Problems abound because Citigroup has already taken a bite at the bailout apple, securing $25 billion from the feds in October. And let's not forget the $7.5 billion injection (payable at 11%) from the Abu Dhabi Investment Authority (a Sovereign Wealth Fund) that was made last year.I'm picking up on this story because not only is Citigroup scrambling for solutions this weekend, but I want to point out that this isn't the first time Citigroup has found itself in such dire straits with other financial institutions. As I pointed out in an earlier post, what was then called Citibank found itself in a terrible mess in 1982 when it - along with 9 other U.S. banks - was over exposed to developing countries around the world.
How exposed, you ask?
By 1982 America's 9 largest banks had loaned out more than 350% of total capital on hand (capital is essentially what you have left after you pay off all your debts). Citibank was one of those banks. When one of their clients (Mexico) said, "We're broke and can't pay you" Citibank had a decision to make. They could act like a free market player, and take their lumps for making terrible investment decisions, or they could go to the federal government and ask for help. They went for help. The "free market" oriented Reagan administration obliged.
As I write these words Citigroup is in talks with the federal government, trying to figure out how to save itself. I could be wrong, but I doubt they'll get the Detroit Treatment. Citigroup is simply "too big to fail."
As Yogi Berra might say, "It's Deja Vu all over again."
- Mark
No comments:
Post a Comment