Citi and Federal Government in New Non-Rescue Rescue Talks

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.

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  1. Anonymous

    Makes me think the first round of stress tests are just about completed, and Citi didn’t get a passing score.

  2. Anonymous

    I was involved with Transfield Pty Ltd when their family squabble was on the boil, still remember the company huddle to announce ALL IS WELL, it was a double black bump run down a 6mo mountain. The bigger the talk the graver the danger they say.


  3. Anonymous

    Yves said,

    “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.”

    Couldn’t one postulate that “a meaningful run” has begun already? With Citigroup’s size, wouldn’t it take more than just a few days for a run to begin to have a serious effect upon Citigroup’s balance sheet? Could the run have been at a slow boil since Geithner’s disastrous “plan” announcement?

  4. Anonymous

    slow motion nationalization …

    ten times more expensive with double the fun of loosing money and chance of not working nearly certain. But, it’s the real market solution. Yay politics.

  5. esb

    Perhaps the PRC will be willing to help (again) in exchange for the face building “compensation” of being allowed to “accidentally” sink one of our (lesser) ships with impunity.

    If so, perhaps we can trade a stepwise ignominious withdrawal from the Southern Western Pacific for economic survival (for a time).

    The current crop of Anglo Saxon leaders will trade just about anything for one more cycle, so why not that?

  6. Anonymous

    Anon 1:58

    It was about an 8 percent run on deposits over a little less than 3 weeks that finally did in Washington Mutual. About $16 billion or so withdrawn.

    A similar run on Citi would be about $160 billion.

    There has to be a decent amount of customers that have accounts that would exceed FDIC coverage at a bank the size of Citi. Even if not there could be more than a few people worried that if the FDIC stepped in that they might lose access to their money for a period of time since FDIC has low funds.

    Though that is a highly unlikely event to happen it doesn’t mean a customer wouldn’t think that way.

    Like most of the top 20 banks Citi had been seeing significant growth in 100,000+ CD Deposits. Though I had not reviewed their last quarter filings to see if that had changed (It hadn’t for other banks I have been watching). A run by those kinds of account holders could add up pretty quickly.

    And they no doubt have large corporate accounts where moving those kinds of accounts to other institutions would add up even faster.

    My experience from working in the industry tells me that when a negative action is taking place or about to take place that you take whatever senior management is saying and turn its meaning around 180 degrees and you will be closer to the truth.

    Whatever the rumor, Citi shares have barely moved in a very narrow range compared to all other large banks (except Huntington) that have seen much wider movement (up and down) over the past two days.

    If the government is truly reluctant or completely unprepared to take down Citi they need to get out in front of this – yesterday.

  7. bg

    I have been optimistically hoping that all of the bald faced lies were simply a distraction. Meanwhile our trusted leaders were secretly plotting a worldwide nationalization (with bondholder haircuts) of distressed financial companies. Could this be the weekend?

  8. Swedish Lex

    Winston Churchill: “Americans will always do the right thing . . . after they’ve exhausted all the alternatives. …

  9. GreenspanPutExpired

    Yves, you’ve got that wrong for once: “Has anyone ever prepared for an event they don’t expect?”
    Yes, you should prepare for the unexpected, as far as possible. Remember, people did not expect falling house prices, hence did not prepare for them.

  10. Steve

    Pandit says in a 3/9 memo to staff that Citi was `profitable through the first two months of 2009′ and the bank is its `best quarter-to-date performance since the third quarter of 2007.’ (

    If this is true, and the WSJ report is true, then it sure sounds like a liquidity crisis. Two big if’s. Anway, in my experience during the last banking crisis, people from OCC, Fed, Treasury and FDIC don’t get together for bullshit sessions on weekends.

  11. fresno dan

    J a p a n
    Japan II
    …wait for it…Japan!
    I see Krugman saying maybe Japan wasn’t so bad…expect to see a lot more of that.

  12. Dave

    Well, if citi can’t even withstand the relatively benign (so-called) “stress test”, then they have no chance of facing what is actually looming on the horizon.

    The Fed will inject yet another massive slab of cash on woeful terms under the pretence of “maintaining liquidity”, only to be forced in a couple of months (?) from now to reach again for the fire hose as the “stress test” scenario shoots by in the rear view mirror of the market.

    What an unmitigated disaster on all fronts.

  13. ruetheday

    Anonymous 1:24AM – Yep. I seem to recall the stress tests being due tomorrow, 3/11. Citi, being the first to undergo them, probably just had theirs scored and the results weren’t pretty.

  14. Anonymous

    Wasn’t their a news piece floating around several days ago about a 500 billion emergency fund being set up in case of a major failure of a Bank? Awfully suspicious those numbers coincide with the 500 billion in this article.

  15. Anonymous

    When you see announcements that Citigroup has the best profit performance in a year then in the current climate suspicion arises that something must be up. We know that executives at Citibank had a recent spat with the various agencies claiming they were getting all sorts of conflicting information, so discussions are unlikely to be that amicable. My guess would be that discussion are on going about government insurance on Citigroup debt much as the UK government has done for RBS and HBOS. Funnily enough that worked out to about 500billion as well.

    I guess the US tax payer must be getting used to accepting huge losses by now as I don’t expect the FED to charge much for the insurance and will probably take most of the loss. This is of course following the Swedish route and is thought to have been a big contribution to the recovery of banks there, although they did nationalise them in the end. We perhaps should also take note that Sweden’s bank management teams failed to learn their lessons and are now back in deep trouble.

    Personally I cannot help feeling that Citibank grew too quickly and its leverage buyouts mean it is structurally unsound, even if individual parts are fine. Bronte Capital though has a slightly different view of banks tending to follow Warren Buffets thoughts (see link below).

    Fools Seldom differ

  16. Steve R. Barbour

    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 you are willfully blind, or an ignorant fellow that hasn’t payed any attention to what is going on, perhaps you might believe that the government swallowed a $22 billion dollar loss in that transaction.

    Here in reality, however, it is quite apparent that the total value of the governments $45 billion dollars of preferred is…


    Hence, anyone with the slightest clue of how bad things are, or who stopped and thought instead of reacting with blind anger would have immediately realized that there is no nominal monetary effect at all. ($0 to $0 is a $0 loss) — we actually lost all $45 billion dollars sometime back in October/November when the money was thrown down the rat hole.

    There are however, a few magical not quite so tangible effects of doing this:

    1) It reduces Citigroup’s outflow (though hardly enough to matter)

    2) It gives the government voting rights

    3) It may improve upside potential… if subsequent conversions of debt don’t destroy that equity anyway…


    Of course, one could presume that all the good people in the government didn’t actually know their preferred are worth nothing, and that the common stock is also worth nothing…

    … but if you believe that, I have a bridge to sell you.

  17. Anonymous

    Bernanke’s term to justify a fictitious price when he was before Congress was “franchise value”.

  18. ruetheday

    C stock is surging on Pandit’s comment that C is operating at a profit this year through Feb.

    Did people forget to read these two sentences in the press release:

    “CEO Vikram Pandit said Citi had an operating profit of $8.3 billion before taxes and special items through February.”

    “Provisions that could offset all or part of the operating profit include credit losses, write-downs and additions to loan-loss reserves.”

  19. john bougearel

    “No New Rescue” just normal day to day ops for a bank in crisis….

    While Fed officials describe their wide-ranging and preliminary discussions as “contingency planning,” YS labels the discussions as “weasel-wording.”

    Meanwhile, did anyone notice that they labeled these “contingency plans” as “preliminary?” We have been in a disaster modality since Paulson wiped out all the GSE shareholders in September guaranteeing that no new private capital would come into any of these poisonous banks and that the taxpayer would have to assume the role of bailout of last resort for these criminals.

    Yeppur, that was 6 months ago. And oh, those soundbites of false reassurances we are getting leaked from these discussions are exactly that ~ soundbites of disillusionment intended for public consumption. Yves is right, this is exactly what happened just prior to the run on BSC. So, you know what the good news is here? We could be close to forcing a resolution of one of the biggest overhangs still clogging the financial system ~ Citi. And that would be a very good thing. A market resolution (i.e. a bank run of $500 billion of foreign deposits) would force these schmucks from any further pussyfooting around.

    Oh, and the WSJ article inferred that these contingency discussions were “geared towards future planning.” I think it safe to safe that these contingency discussions are most probably geared towards “doomsday planning.” There is no future at Citi.

    It is worth noting too, the recent escalation in bailouts. Both Citi and AIG are recieving bailouts a week or two ago, and are both returning to the trough just a week or two later. And we are not still in crisis? C’mon!

    I think we should dub these latest rounds of “contingency-planning” as “grey-swan” planning. These are grey swan plans, because they are known and probable, not black, unknown and improbable.

  20. General Glut

    I want to reiterate the insights from reader “ruetheday” above. The markets are surging today off of this single line in Vikram Pandit’s memo to Citigroup employees:

    “In January and February alone, our revenues excluding externally disclosed marks were $19 billion.”

    “Externally disclosed marks” means asset markdowns, yes?? So Citi is making lots of money — if you simply ignore all the money it’s losing?

  21. kmurp

    “Yves here. Even if you merely read this literally, it isn’t credible. Has anyone ever prepared for an event they don’t expect? “

    Yes. In my field, we do this rather frequently It is prudent to prepare for a low incidence but high severity event.

  22. General Glut

    Thanks, anon. I am indeed the General Glut. I’ll take your request under consideration.

  23. tz

    If you believe that, I have a bridge I’d like to sell you.

    But will you arrange a bridge loan for the sale?

    As to providing for the unexpected, that is why there were leverage limits.

    Unexpected does not mean improbable. My car is having problems which are unexpected, but given its age not improbable. (will it be the engine, transmission, electrical, or a stone in the windshield?). I keep enough cash around to fix any unexpected but probable event.

    If you expect something specific, you try to fully account for it. But this is like a noise spike in a signal. You can’t quantify it, but you can design or program around it. Another example would be DVDs or CDs which WILL get scratches, but you can’t expect them to be in any specific location. So you do error correction.

    The problem is the “rocket scientists” were looking at DVDs in a cushioned clean-room instead of ordinary usage – which can be worse if you tell someone “oh, they will work even when scratched”, which makes people lax about putting them in sleeves.

  24. Yves Smith

    As to my “Even if you merely read this literally, it isn’t credible. Has anyone ever prepared for an event they don’t expect?”, if you foresaw it in any form, you DID expect it. This is the point Taleb makes about black swans, Anything someone foresaw is by definition not a black swan.

    By definition, if you prepared for an event, you did expect it. Even assigning it a low probability is an expectation.

  25. Anonymous

    Well the market went up hundreds today so we are all safe now.

    My read of the entrails of the owl tells me that with the G20 coming the fascists in America are a bit twitchy. How are they going to punk the rest of the world the way that they have done to the US. Maybe the rest of the world will not take the screwing as well as Americans and will protest.

    America may have to nuke one of the recalitrant countries to keep everyone in line but what is all that military for if you don’t abuse other countries with it.

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