http://blogs.wsj.com/deals/2008/11/21/citigroup-you-cant-step-into-the-same-crisis-twice-right/
Citigroup: You Can’t Step Into the Same Crisis Twice, Right?
Posted by Heidi N. Moore
Citigroup is under attack. The stock is being battered, and the company is blaming the shorts. As market commentators worry about how long the banking giant can hold out, Chief Executive Vikram Pandit insists that Citigroup will not change and won’t sell itself.
For anyone who has watched the markets with horror this year–and that’s pretty much everyone–the parallels to Lehman Brothers Brothers and Bear Stearns seem obvious. Barclays Capital banking analyst Jason Goldberg points out that other firms whose stock prices fell so steeply fell into a downward spiral that included “deposit outflows, funding difficulties, reduced business activity, counterparty concerns, wider [credit-default swap spreads], agency downgrades, and additional collateral requirements.”
The parallels may be obvious, but are they accurate?
After all, Citigroup can benefit from government bailout programs that weren’t available to Bear Stearns, Lehman Brothers Holdings and Merrill Lynch. It also is a commercial bank, which adds an additional range of bailouts from the Federal Deposit Insurance Corp. and the Federal Reserve.
Deal Journal took a look at the ways in which Citigroup is similar to Lehman, Bear and Merrill, and the ways in which its playbook may differ from the limited options available to those banks.
Citigroup feels no urgency to do a deal and insists it will keep traveling down the same path: This is a biggest way in which Citigroup’s strategy parallels that of Lehman and Bear in their final days. Bear insisted all the way to the hospital that its business was healthy and kept protesting until regulators pushed the firm into the morgue. Lehman talked to several suitors but negotiated hard on price because it didn’t see a merger or capital infusion as an immediate requirement for survival–a point of view that irritated Treasury officials.
Citigroup can use Treasury’s Capital Purchase Program: The CPP is the Treasury program that allows the agency to buy direct equity stakes in banks, and it has already promised as much as $25 billion to Citigroup. While that would be dilutive to common shareholders, it does provide a cushion for the bank that wasn’t available to Lehman, Bear or Merrill.
TARP funds are used at the discretion of Treasury: It used to be that Hank Paulson would have to beg Congress to get a little money. But TARP still has hundreds of billions of dollars available, and if Paulson needed emergency funds, he could devote as much as he wanted to Citigroup–if he wants to. TARP also didn’t exist for Lehman, Bear or Merrill, and it wasn’t available to commercial banks like National City and Wachovia that were forced to sell.
Citigroup is a commercial bank, which gives it the best of both worlds: Lehman and Bear fell at a time when securities firms needed special dispensations to get government funds that were always available to commercial banks. Here is how Ladenburg Thalmann analyst Richard X. Bove Friday summed up Citigroup’s safety nets as a commercial bank:
The following programs backstop Citigroup’s liabilities: a) its deposits are FDIC insured; b) the company is working out a program to insure some of its debt with the FDIC; c) the Federal Reserve discount window is always open to the company; d) it can sell commercial paper to the Fed; e) it can use the primary dealer debt facility; f) its deposits, which equal $780 billion, are primarily sourced overseas (64%) giving the bank greater diversity in capturing funds; g) it has access to bank protection programs in multiple countries around the world; h) it has $393 billion in long-term debt; i) it has net free cash flows; j) it has paid down $94 billion in long-term debt this year and $42 billion in short-term debt; and k) it is reducing the size of its <span><a href="/finance-dictionary/what-is-a-balance-sheet-BS">balance sheet faster than</a></span> any other company in the banking industry (estimated $300 billion).
Regulators are chastened by the fall of Lehman: Treasury believed that “moral hazard” demanded punishment for banks took too much risk. But the agency’s decision to let Lehman fail has become a lightning rod for criticism, and in some quarters has been blamed for the subsequent two months of disastrous markets. Lehman was an object lesson in the cost incurred when government does nothing. It is unlikely the government wants to let that happen again.
Of course, with Citigroup’s $2.2 trillion balance sheet and global footprint, even all of that may not be enough. In his report Friday, Barclays’ Goldberg said, “we believe the market maybe implying some sort of regulatory intervention at C.”
That would make Citigroup exhibit No. 1 in how brutal market reversals have become: In a mere eight weeks, the company that once fancied acquiring Wachovia and was approached to discuss buying Goldman Sachs Group now may be the one that requires help.
