Fed Moves To Rescue Citigroup
At one time the largest bank in the world by market value, Ciitgroup saw it’s stock plunge over 60% last week and was in danger of collapse before the Federal Reserve intervened on Sunday. To put it in perspective, Citigorup’s maket value had fallen to below $21 billion on Friday, which is less than what JP Morgan paid to purchase Bear Stearns back in April, at the same time it has over $2 trillion in assets making it twice as large as AIG.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In order to prevent an even worse occurence of what happened to markets after Lehman Brothers collapse, the Fed agreed to take on the risk of 90% of their debt. An additional $20 billion from TARP funds will also be used to increase the governments investment in the bank to over 7%.
When considering companies in the ”too big” to fail category, Citigroup was the biggest in the banking system. The Fed had no choice but to step in and in doing so, it opens the taxpayers up to even more liability.
They won’t be the last bank to need assistance either, while they were the biggest, there are hundreds of banks on the FDIC’s troubled banks list. I think people are finally beginning to realize how colosally expensive this whole mess is going to become in the end.
The Fed’s will likely lower rates to at least 0.5% after it’s next meeting but will that be enough to restore confidence to credit markets? And now it looks as if Congress is beginning to question the Fed’s actions in accumulating risk to the taxpayer.
The Fed has already pledged trillions in liquidity to the banking system but no matter what they do, holes keep springing up. As things stand now, it appears as if the Fed has no real control over the situation and are left to react as best they can.
