From Justin Fox of Time Magazine:
FDIC chairman Sheila Bair doesn’t think a full government takeover of Citigroup and other multinational financial institutions is practical or even possible. Here are her reasons, as summarized by Pete Davis:
1. The legal authority to take over large banks does not currently extend to multinational financial conglomerates;
2. The FDIC lacks the funding to conduct such a massive bailout;
3. Other countries have regulatory oversight of these financial conglomerates too, and they may object to a U.S. takeover.
Perhaps we are getting the reason Geithner and company are reluctant to take on Citi: they have no deposit base for the feds to step in on relative to their asset base. Remember, Citi wanted to buy Wachovia for more deposits. The domestic bank Citibank simply does not have that many deposits. The nearest Citi branch — which I use — is actually only 6 blocks from my house. But, it operates largely in the Tri-State area of New York, New Jersey and Pennsylvania and has little presence outside. Justin Fox puts it well:
To repeat: Citigroup has liabilities of $1.797 trillion. The deposits that the FDIC has some responsibility for (up to $250,000 per depositor) add up to $241 billion. So we have this reasonably sensible system for winding down troubled banks, but when it comes to the most troubled big banking company in the country, said system only covers a fraction of the overall operation. Which leads to a couple of conclusions:
1. I get why the administration is so reluctant to take over Citi completely.
2. I don’t get why we all (I’m including myself in this) thought it was okay to allow the creation and growth of gigantic financial companies for which we had absolutely no plan for winding down in case of trouble.
And remember the problem with Banamex, which Citi owns. The Mexicans could see Citi as state-owned. After all, the TALF considers 25% the state-owned threshold.
This banking crisis gets more interesting by the day.
Sources
How much of Citigroup could the FDIC actually take over? – Time
Bana-vexed – FT Alphaville