Citi Has Few Options Left
What happened? It looked like City was going to weather the storm? Just a few weeks ago, the bank stood as one of the few survivors of the collapse on Wall Street which took down Lehman Brothers and forced Goldman Sachs and Morgan Stanley to convert into bank holding companies. In fact, Citi was asked by the government to acquire another victim of the financial meltdown – Wachovia. Now, Citi itself is on the operating table waiting for life support. What happened to what used to be the world’s biggest and mightiest financial services institution?
Things really started going south for Citi with the aborted Wachovia deal. Although the deal was a marriage pre-arranged by the government (which was to absorb billions of Wachovia’s bad loans) Citi failed to close. Wells Fargo came in just days after the announcement of the potential Citi takeover with a lot more cash in hand. What followed were a few days of legal battles during which Citigroup tried to put a restraining order in place to protect its deal with Wachovia. Eventually, Citi walked away which in the eyes of many was a sign of weakness since it could not match what Wells Fargo was offering. Citi was the clear loser here.
This lead to lots of talk about Citi’s continuing losses and internal structural weaknesses. That kind of talk can be the beginning of the end for banks in the current market, especially after Hank Paulson announced that TARP funds will not be used for mopping up toxic debt, as originally announced. It did not help that in the meantime Citi won a couple of law suits. Other bad news piled on. Citi announced that it will cut additional 50,000 jobs and will have to bring more bad debt on its books. Put all this together and you get a very nasty mix leading to a week during which the bank lost more than 50% of its stock value.
Right now the only viable option for Citi is some kind of government intervention. I don’t think that a merger with another institution is possible. There are no players that have the capacity to digest a merger with Citibank (even with a market cap at $20.5 billion). Selling off parts of the business is also not going to save the bank. What is most likely is another cash infusion or partial nationalization. Citigroup may not be left to fail. Failure will result in a disaster for the financial industry. The sheer size and global presence of Citigroup will make the Lehman Brothers’ failure look like a child’s play.
Most likely, we will hear on Monday that the government is going to assume some of Citi’s bad debt or possibly acquire equity in the bank. The question now is what will be the terms of the Feds.
Things really started going south for Citi with the aborted Wachovia deal. Although the deal was a marriage pre-arranged by the government (which was to absorb billions of Wachovia’s bad loans) Citi failed to close. Wells Fargo came in just days after the announcement of the potential Citi takeover with a lot more cash in hand. What followed were a few days of legal battles during which Citigroup tried to put a restraining order in place to protect its deal with Wachovia. Eventually, Citi walked away which in the eyes of many was a sign of weakness since it could not match what Wells Fargo was offering. Citi was the clear loser here.
This lead to lots of talk about Citi’s continuing losses and internal structural weaknesses. That kind of talk can be the beginning of the end for banks in the current market, especially after Hank Paulson announced that TARP funds will not be used for mopping up toxic debt, as originally announced. It did not help that in the meantime Citi won a couple of law suits. Other bad news piled on. Citi announced that it will cut additional 50,000 jobs and will have to bring more bad debt on its books. Put all this together and you get a very nasty mix leading to a week during which the bank lost more than 50% of its stock value.
Right now the only viable option for Citi is some kind of government intervention. I don’t think that a merger with another institution is possible. There are no players that have the capacity to digest a merger with Citibank (even with a market cap at $20.5 billion). Selling off parts of the business is also not going to save the bank. What is most likely is another cash infusion or partial nationalization. Citigroup may not be left to fail. Failure will result in a disaster for the financial industry. The sheer size and global presence of Citigroup will make the Lehman Brothers’ failure look like a child’s play.
Most likely, we will hear on Monday that the government is going to assume some of Citi’s bad debt or possibly acquire equity in the bank. The question now is what will be the terms of the Feds.
Labels: Wall Street
posted by Nik at 8:37 PM
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