Why does Citigroup, not Lehman, get rescued?
By Konstantin Rozhnov
Business reporter, BBC News
The US government’s decision to bail out Citigroup, one of the world’s biggest banks, resurrects memories of the collapse of Lehman Brothers, except that one of them is getting help while the other was allowed to collapse.
Citigroup hopes not to repeat Lehman Brothers’ fate
Citigroup has 200 million customers in 100 countries, almost $800bn (£533bn) in bank deposits and $2 trillion in assets.
Last week, shares in the group fell 60% on fears the finance giant was in trouble.
The bank’s management has insisted that the bank has “very strong capital and liquidity position and a unique global franchise”, but this has not reassured investors.
The scenario was similar to the events that led to the bankruptcy of investment bank Lehman Brothers in September amid the global financial crisis: a sharp drop in the share price, and the potential exodus of customers, which are fatally dangerous for any bank.
But for Lehman Brothers, the US Treasury was unwilling to put more taxpayer money at risk after saving Bear Stern, Fannie Mae and Freddie Mac.
However, Lehman Brothers’ bankruptcy was a key factor in deepening the credit crisis, which later caused the Federal Reserve and other central banks around the world to inject hundreds of billions of dollars into the banking system.
‘Too big to fail’
“If you think Lehman Brothers was big, Citi is several times [bigger] in terms of exposure,” said Robin Farzad, a reporter for Business Week.
This proudest of US banks has been humbled: the rescue is about as close to nationalisation as it’s possible to get without the state taking 100% ownership.
BBC Business editor
In September, the US government announced a multi-billion dollar rescue package for AIG, the country’s biggest insurance company, using the “too big to fail” formula.
Many analysts believe Citigroup, another giant whose collapse would badly hit the already jittery US financial system, is strong enough to overcome the current difficulties if it implements changes to the way it operates.
They argue it is crucial for Citigroup to find a way to boost its share price, to increase investor confidence in the bank.
The agreement between Citigroup and the US government appears to give the bank a good chance to increase its market capitalisation, which fell to $20bn on Friday. In 2006 it stood at $270bn.
Time and money
What is important, though, is why the government decided to increase its debt burden by helping Citigroup instead of trying to find a buyer for the bank, which had become a takeover target for its stronger rivals.
It does raise questions about what it means for the industry longer-term
David Forrester, Barclays Capital
If in September the US Treasury hoped Lehman Brothers would be bought and saved by a competitor, any hopes that Citigroup would be acquired were negligible.
As the financial crisis has shown little sign of abating, most financial institutions have been dealing with their own problems.
They may either have no cash to spare or have decided it is too risky to be associated with a bank that has fallen out of favour with investors.
The government could not afford to waste time trying to save Citigroup in any way other than its own bail-out.
Citigroup is much bigger and more complex than Lehman Brothers was, but it is widely believed that in the latter’s case, the lack of time prevented Lehman from implementing any sale plans.
The question now is whether the bail-out will be enough to save Citigroup from further troubles.
Not all the analysts are optimistic.
“In the near term it reduces systemic risk, but it does raise questions about what it means for the industry longer-term,” said David Forrester, foreign exchange strategist at Barclays Capital in Singapore.
Obama names his US Treasury team
President-elect Barack Obama has named his top economic advisers to oversee a huge economic stimulus package.
Timothy Geithner, the president of the New York Federal Reserve, will be the next US treasury secretary.
Lawrence Summers, himself a former treasury secretary, will become the new head of the White House’s national economic council.
Christina Romer of the National Bureau of Economic Research will chair Mr Obama’s Council of Economic Advisers.
At a press conference in Chicago, Mr Obama said he had sought leaders who could offer “fresh thinking”.
“Even as we face great economic challenges, we know that great opportunity is at hand – if we act swiftly and boldly. That’s the mission our economic team will take on,” he said.
“We need a big stimulus package that will jolt the economy back into shape.”
“I look forward to working closely with them in the months ahead. And that work starts today, because the truth is, we don’t have a minute to waste,” he said.
Offering a grim prediction, he added, “Most experts now believe that we could lose millions of jobs next year.”
He said his priority for the US economy would be to create 2.5 million new jobs. Some observers say the economic stimulus package could eventually total $700bn.
Speaking of the challenges that lie ahead, Mr Obama said: “We are facing an economic crisis of historic proportions.
“Our financial markets are under stress. While we can’t underestimate the challenges we face, we also can’t underestimate our capacity to overcome them,” he said.
KEY ECONOMIC APPOINTMENTS
US Treasury secretary:
Timothy Geithner, president, New York Federal Reserve
Director, White House National Economic Council:
Lawrence Summers, former Treasury secretary
Chair of the Council of Economic Advisers:
Christina Romer, co-director, National Bureau of Economic Research
Speaking of his treasury secretary, Mr Obama said that having served in senior roles at Treasury, the IMF and the New York Federal Reserve, Mr Geithner would offer, “an unparalleled understanding of our current economic crisis, in all of its depth, complexity and urgency”.
Timothy Geithner – who also serves as vice chairman of the interest rate-setting Federal Open Market Committee – was key to the bailouts of insurance giants AIG and Bear Stearns, and in the decision to let Lehman Brothers collapse.
Obama’s top strategist David Axelrod said Mr Geithner was “intimately involved with the situation now in his role as president of New York Fed. By temperament and experience, he’s the right man to lead the Treasury now.”
Lawrence Summers, was President Bill Clinton’s last Treasury secretary, and will now be director of the National Economic Council, which is tasked with co-ordinating the president’s economic plans.
“Larry has earned a global reputation for being able to cut to the heart of the most complex and novel policy challenges,” said Mr Obama.
Mr Summers has a reputation for blunt speaking. He resigned as president of Harvard University in 2006 after a series of run-ins with faculty and students, including his assertion that men may be innately better at mathematics and science than women.
Christina Romer, a co-director at the National Bureau of Economic Research, will chair Mr Obama’s Council of Economic Advisers.
She is an expert on the impact of tax cuts on economic growth – a central plank of Mr Obama’s programme to resuscitate the US economy – and has written extensively on the Great Depression in the 1930s.
The president-elect also announced the appointment of Melody Barnes as director of the Domestic Policy Council.
Mr Obama takes the oath of office on 20 January as the US’s 44th president, and will confront economic difficulties as great as any since the Great Depression in the 1930s.