The double-speak in this Wall Street Journal piece, “U.S. Weighs Further Steps for Citi.” is so thick that parsing it is like wading through mud.
And I do mean to stress the attempts to obfuscate what is going on. Recall that the last retrade of Citi’s arrangement with the officialdom was initiated by the big bank, which seemed a bit annoyed that the government did not jump when it demanded attention (the result was not a new cash injection, but Citi did just fine anyhow. As Bruce Krasting explained:
Last Friday Treasury agreed to convert $25 Billion of the TARP Pref for 36% of the common of Citi. The problem is that as of the close of business on Friday 36% of Citi is only worth $3 billion. This convert looks like a $22 Billion loss.If your broker had slipped a few of these Preferreds into your account last fall and you joined the Feebs on Friday in the convert to Common your account would be down 90% in fewer than four months. Fleeced.
This time, it appears the powers that be initiated the talks with Citi. And no, of course they are not worried, they are doing mere contingency planning.
If you believe that, I have a bridge I’d like to sell you. If this really were contingency planning, the Fed and Treasury should have been on that case the day after the Bear deal was finally wrapped up. And if it was really mere contingency planning, don’t you think the Treasury would be doing the same for some of the other big banks?
The ratio of weasel wording to real content is unusually high:
Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.Federal officials describe the discussions, which are wide-ranging and preliminary, as “contingency planning.” Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.
Yves here. Even if you merely read this literally, it isn’t credible. Has anyone ever prepared for an event they don’t expect? Back to the article:
Citi executives said they haven’t detected signs of corporate clients or trading partners withdrawing their business, even though the New York company’s shares are hovering near $1 apiece — closing Monday at $1.05 on the New York Stock Exchange. Citigroup says it has a strong liquidity position and that its capital levels are among the highest in the banking industry.
Yves again. Boy, is this not reassuring. We heard the same formula from Bear and Lehman. And did you notice the failure to mention the real elephant in the room, the biggest source of vulnerability……foreign depositors? Citi has over $500 billion (relative to a balance sheet of a tad under $2 trillion) of foreign deposits. A meaningful run would swamp its capital and available liquidity. Back to the story:
Banking regulators and Treasury officials called Citigroup executives over the weekend amid rumors about the discussions, according to people familiar with the matter. They said the talks were geared toward future planning and that no new rescue was imminent.Citigroup CEO Vikram Pandit issued a memo to employees Monday as the company’s shares hovered above $1, arguing the current price does not reflect the company’s capital position and earnings power. Read the memo.
The discussions include the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. The FDIC backs many of Citigroup’s deposits in the U.S., as well as a large amount of new debt issued by the firm.
Regulators say the planning should be seen as a normal function of government during a financial crisis. One possible future step could involve creating a “bad bank” to take distressed assets off the balance sheet of Citigroup or other troubled financial institutions. Differing approaches are still being considered. Treasury officials already are developing a public-private partnership to tackle that problem more broadly, and the two concepts could either run parallel or be merged…..
Yves here. Again, the disaster planning has started when the horse has left the barn and is now in the next county. And the bad bank talk for Citi has been on since Paulson’s failed MLEC concept, circa late 2007, and is nowhere close to being operational. And even then, it was clear that the main beneficiary was to have been Citi, who had far and away the biggest structured investment vehicle exposure of any bank. To the Journal:
Also complicating matters, U.S. officials don’t have a template for winding down a company of Citigroup’s size and complexity, which Federal Reserve Chairman Ben Bernanke made clear at a Senate hearing last week.“I’d like to challenge the Congress to give us a framework, where we can resolve a multinational complicated financial conglomerate like Citigroup, like AIG, or others, if that became necessary,” Mr. Bernanke told the Senate budget committee.
Yves again. As we (and increasingly others) have said, a special bankruptcy regime for securities firms should have been the first order of business after the Bear failure. And I missed Bernanke’s cheap shot at Congress. It’s the Fed that has assigned itself the job of financial stability regulator, so the retort that Congress couldn’t do better is childish.
Hopefully we are wrong about stress at Ciit, but there are reports of growing strain in the credit markets, and Citi may be vulnerable. Perhaps the authorities are finally, belatedly, addressing issues they should have tackled months ago.
Anonymous 
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Makes me think the first round of stress tests are just about completed, and Citi didn’t get a passing score.