When a bank with $2.2 trillion in assets is saved from potential ruin, it is big news. So, as you can imagine, every one and his brother has a take on what went wrong at Citigroup and whether the solution to ‘fix’ Citi was the right one. Below are a number of the best links to commentaries around the blogosphere regarding Citi’s demise.
However, while I’m at it, shouldn’t I share my two cents as well? Now, although I have spilled a lot of ink on this one, I don’t think I have been explicit enough to date about Citigroup. Let me spell it out. The global economy is about to enter a deep recession necessitating hundreds of billion dollars more in credit writedowns by financial institutions. Citigroup will be foremost amongst the banks writing down assets. Therefore, it is unclear whether Citigroup is suffering liquidity problems or insolvency problems..
We should fully expect large writedowns on auto-and credit card- related asset backed securities that must be marked to market. Citigroup will take a very large hit here. But then there are residential property (Subprime, Alt-A, Payment Option, Negative Amortization Mortgages), commercial property (Commercial Real Estate and Construction Loans), and leveraged loans and high yield bonds (from Private Equity LBOs). Defaults in none of these asset classes have reached their business cycle top.
The U.S. Government is due to start picking up the bill after $29 billion in pre-tax writedowns and after loan loss provisions at Citi. I anticipate we will see many more than $29 billion in writedowns at Citi. The only question is whether the company has adequate provisioning and can make enough money in the next few years to cover the writedowns. Otherwise, the Cit deal is a bust financially for taxpayers.
I should also add that no heads rolled at Citi as a result of the bailout. In the UK, the boss at RBS lost his job and his successor apologized to shareholders. As I see it, the Citi bailout lacks accountability.
That’s all I have to say. Here are the other commentaries:
The Citigroup Bailout – Mark Thoma (not impressed)
Citi’s Underwhelming Bailout – Felix Salmon
Citi’s Woes Began With Failed Wachovia Bid – Deal Book
Citi Saw Little Risk as It Made Bolder Bets – Deal Book
The Brad DeLong question – and how to design a bailout that works – Bronte Capital
WSJ: U.S. Agrees to Bail Out Citi (Updated) – Naked Capitalism (GM is next in line)
Citi Bailout – The Big Picture (tell us what you really think, Barry)