Monday, November 24, 2008 2 comments ++[ CLICK TO COMMENT ]++

Massive Citigroup bailout worth as much as $326 billion

The US government agreed to backstop Citigroup's assets in a bailout worth as much as $326 billion. The complex plan involves Citigroup limiting dividends to one cent per share for a few years and the government getting a say on future executive compensation. The government will also receive preferred shares and warrants with strike price about 5x above the stock price on Friday (unless the company can itself around the warrants will likely end up worthless.)

This is the type of deal that is necessary when banks have grown too large for their own good. This move will help in the short to medium terms but will be detrimental to the economy in the long run. By backstopping poorly run firms with questionable assets and business decisions, the government is indirectly penalizing the well-run firms.

I think Citigroup needs to give up on its megabank idea and start splitting up the company. Some people criticize the whole concept of the megabank idea but I think it can work. One just needs to look at HSBC and see how it has done well over the years. As the countries become linked, consumers and businesses will start rewarding those that have global capabilities. However, my impression is that Citigroup has failed at this task and is probably incapable of running a global megabank.

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2 Response to Massive Citigroup bailout worth as much as $326 billion

November 24, 2008 at 4:41 PM

Concept of megabank is not so bad - it's not only about the economy of scale. The bigger you are, the better you can diversify the risk. Oh yeah, but why would you do that, when you know there is a lender of last resort?
The truth is governments want banks spreading money all around. Because it works in a short term and boosts (artificial) investments=growth. And that's what they want...
Regards,
Elli

tc
November 24, 2008 at 7:22 PM

Citi's shareholders did not take a hit in this bailout. So that goes against your "fear of gov't seizure" thesis.

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