Back in March when the US Government felt compelled to bail out out Citigroup, Tracy Alloway over at FT Alphaville noticed a curious thing – Citigroup had effectively been nationalized.
No, they were not seized by government, but Citi was controlled by government. The Feds had 36% of shares outstanding, which in many cases is considered to be a controlling interest for a government (for instance, until the Open Skies Treaty pushed the level to 49%, foreign carriers could not take more than a 25% stake in any airline as this is considered a threat to national security). That matters because of Banamex.
From Alphaville on 2 Mar:
Does the US government’s 36 per cent stake in Citi violate Mexican ownership laws? Have we got our countries confused? No.
Citi owns Banamex, a Mexican bank with circa 1,200 branches and 2.6m checking accounts. And Latin American finance blog Inca Kola sees a fight brewing over the Southern subsidiary:
The nub of the issue revolves around Mexican law, which states in crystalline manner that foreign governments cannot own more than 10% of any bank that operates inside Mexico. It’s as clear as a bell and on the statute. So as Banamex is a wholly owned subsidiary of Citigroup (C paid $12.1Bn or so back in 2001 for the bank) if the US Gov’t takes its 36% stake in Citigroup then it will be a larger-than-10% shareholder of Banamex, something against Mexican law. Won’t it?
Mexico’s National Banking and Securities Commission is therefore investigating, while Banamex is saying that the North American Free Trade Agreement will (somehow) protect it.
The next day Bloomberg reported that Mexican law makers had decided to pursue a bill to force Citi to disgorge itself of Banamex because of it was a government –controlled entity. Then this story disappeared from the mainstream press.
Now, as background, after the recession of 1991, Citicorp was bailed out by Prince Waleed of Saudi Arabia because it was in danger of failing. Low interest rates and the money from Prince Waleed did the trick and Citi experienced a remarkable recovery – and eventually the broader economy did as well. In fact, recovery was enough that Alan Greenspan attempted to raise rates fairly rapidly (this was before policy asymmetry at the Fed because the norm). The result was the Tequila Crisis and the near bankruptcy of Mexico (see my post “1995” for more.)
Banamex , the 2nd largest Mexican bank, was made insolvent due to the Tequila crisis. And what do you know, Citi swooped in to buy it lock, stock and barrel. Spain’s BBVA later took over the re-privatized Bancomer that had been nationalized after the Latin American Debt crisis in 1982 (also induced by rising rates in the US).
These incursions into Mexico have caused outrage. Why should foreigners own the two largest banks in the country? So, the topic of Nationalized Citibank has been percolating for a while in Mexico. And it has just resurfaced.
From Breakingview.com:
Mexico’s high court is set to decide this week whether to hear a case brought by a contingent of Mexican senators that Citi must offload Banamex because a foreign government owns more than 10 percent of its stock. They want the court to decide whether the finance ministry had the constitutional right to decree in March that the United States government’s 34 percent slice of Citi was acceptable because it was intended to be short term.
So Citi is hardly up against a wall just yet — and it reckons any decision to force a sale would breach the North American Free Trade Agreement anyway. But if push comes to shove, the bank should be prepared to put up more of a fight than it did for Phibro.
Quite frankly, America is used to treating Mexico – all of Latin America, really – like its poor cousin. This displays a lack of respect that many there find galling. If Citi is forced to disgorge itself of Banamex, it will be interesting to see not how Citi reacts, but how the Obama Administration reacts since he wants to present a new American image on the world stage.
By the way, below is a hilarious video of ‘Nationalized Citibank’ that captured the mood in America back in March when the bailout happened.