Citi's woes reflect depth of crisis

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Replied by hjm331 on topic Re: Taxpayers Rescue Citibank

Why do you say that?
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  • KIEJON9
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Replied by KIEJON9 on topic Re: Taxpayers Rescue Citibank

We're all going to have to pay for this at the end one way or another and it's not going to be pretty.



Not at all
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Replied by hjm331 on topic Re: Taxpayers Rescue Citibank

We're all going to have to pay for this at the end one way or another and it's not going to be pretty.
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Replied by marylan73 on topic Taxpayers Rescue Citibank

Last edit: 4 years 1 month ago by Finance Globe. Reason: URL Change
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The travails of Citigroup point to a challenge that goes beyond the survival of one of the world's largest banks: Government actions have so far failed to contain the problems shaking the financial industry.
Barely three weeks ago, Citi was one of a handful of banks to receive big infusions of capital from the US Treasury – a move designed to bolster market confidence.
But since then, as of Friday's market close, the bank has lost about 70 percent of its stock market value. And it isn't Citi alone that's faltering. The stock value of America's financial sector as a whole fell by nearly 40 percent in that time.
If a $250 billion program of recapitalization wasn't enough to prop up America's credit industry, what will?
Various approaches are possible, but any strategy may need to grapple with two problem areas central to Citi's troubles:
•Complex and risky investments have created much of the uncertainty about the health of financial firms. The Treasury recently backed off from a plan to buy these assets, but some way of transferring this risk might speed a credit-market recovery. In particular, a decisive approach may be required on a web of contracts that insure against borrower defaults – promises known as credit default swaps.
•Economic conditions are adding new uncertainty for banks. The more consumers retrench and the more people lose jobs, the more loans become delinquent. This risk might be mitigated by new economic stimulus measures.
"The economy is deteriorating tremendously fast," says Raghuram Rajan, a finance expert at the University of Chicago. "The concern is how much more [risk] is there. This stuff seems unbounded. That's what the investor is really worried about at this point."
Navigating through the credit quagmire is proving to be very tricky for policymakers, because of the size and complexity of the institutions involved.
Many, including Citigroup, are considered "too big to fail." A core task for the Treasury and bank regulators is to try to keep the channels of credit functioning as smoothly as possible – a goal that argues for rescuing troubled institutions – while also safeguarding taxpayers.
These goals can be hard to juggle. Often a bank rescue involves wiping out shareholders, so that taxpayers are not asked to bail out investors. But eventually, the government wants the industry to function normally again with private-sector investors being confident enough to provide the capital.
Private money, for now, has all but dried up. Investors are unsure about both the state of bank balance sheets and about the prospect that, for now, the government will be taking bigger and bigger equity stakes in banks.
The plunge of Citi's share price last week reflected these concerns.
"What you're seeing is the markets telling you that equity holders are dead," says Christopher Whalen of Institutional Risk Analytics, which tracks the banking industry.
Although Citi's problems are worse than those of many banks, it is hardly alone in its exposure to risk. Mr. Whalen predicts that the government will be almost "the only provider of capital to bank holding companies for the next year."
In the case of insurance giant AIG, the government has injected money to rescue the company, and in the process has become the largest equity holder. Taxpayers thus stand to gain if the company recovers.
But for now, losses in AIG's credit default swap (CDS) portfolio are devouring federal resources. The size of the rescue effort recently doubled to about $150 billion, and it's not clear how high the tab will ultimately go.

Citigroup also has large CDS exposure, bank analysts say. Also, the souring economy last week raised new doubts about the value of securities tied to commercial real estate mortgages – another area where Citi has a significant stake.
At the time of writing, Citi was reported to be in talks with the federal officials and the Federal Reserve Bank of New York – discussions that could lead to new government help or other action to resolve the concerns about Citi's stability.
Both for big institutions and for the industry in general, financial experts see a range of possible new steps to augment the Treasury's capital infusion program.
One idea is to buy up troubled assets that weigh on bank balance sheets. This idea, an initial goal of the Treasury in the rescue package approved by Congress last month, should be revived in some form, says Mr. Rajan in Chicago.
"The cost may be higher than we've budgeted for so far. But it may be time to bite the bullet and do it," he says.
Often, financial crises have a high cost – 15 to 20 percent of a year's gross domestic product in an affected country, he notes. But the quicker bad assets can be purged, the quicker the system can function again.
He also recommends forcing banks to temporarily stop paying shareholder dividends, a move that would conserve capital and make other government rescue moves more politically palatable, since shareholders will be shouldering a burden.
Another big idea is to resolve the CDS issue. Credit default swaps total trillions in value, and in many cases the contracts were purchased not as genuine insurance (by the holder of a bond) but as a speculative investment that will pay off if the bond defaults.
Whalen calls for a mandatory unwinding of these contracts, in which purchasers who were genuinely hedging a risk would be covered, while speculators would lose much of their potential gains from the investment.
Without some action along that line, CDS obligations could become a black hole for the banking system, he and others warn.
"These things are like land mines," says Michael Greenberger, a former regulator of derivative contracts at the Commodity Futures Trading Commission. "Every indication is that they are at the heart of the financial crisis."
He says a first step is to take an inventory of CDS contracts, since poor regulation makes this market opaque.
He also says it may be necessary to push speculators to take a hit on the value of their contracts. This might be in their interest, he says, since the companies offering the contracts might not survive if they must pay the full amount. Finally, economists say that a large economic stimulus package, if it helps slow the pace of the current economic downturn, would reduce the rising losses that banks face on everything from real estate to credit cards and business loans.
http://news.yahoo.com/s/csm/20081124/ts_csm/aciti
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