Slouching Towards A "Temporary Takeover" Of Citibank

By Big Tent Democrat, Section Economy
Posted on Fri Feb 27, 2009 at 08:43:57 AM EST
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It appears that Treasury Secretary Tim Geithner simply will not bite the bullet. NYTimes:

[T]he Treasury Department announced on Friday that it would vastly increase its ownership of the struggling company. After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake to 36 percent from 8 percent.
Under the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers. The Treasury will convert its stake to the extent that Citigroup can persuade private investors, including several foreign government investment funds, to go along. . . . The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup . . . Taxpayers, after pumping more than $45 billion into the bank, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.

This is simply ludicrous. Bite the bullet now Geithner. "Temporary takeover" of Citi is inescapable. Start fixing the problems now.

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Slouching Towards A "Temporary Takeover" Of Citibank | 92 comments (92 topical)

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Exactly right, BTD (5.00 / 4) (#1)
by allimom99 on Fri Feb 27, 2009 at 08:56:48 AM EST

The longer we wait to do this, the more we risk a japan-style "recovery" - I prefer to hope we will foolow the example of Sweden instead, where they did the temporary takeovers quickly, fixed the deficiencies, and got the banks back into the private sector ASAP.

Sure, the Rs will scream socialism, but they're doing that anyway. This would be the place to spend some of that political capital Obama has at the moment. As you have said, the longer he waits, the less valuable this will be. Bold strokes are needed here, not nibbling around the edges of the dilemma. Doing the right thing is often not the easy way, but it sure looks good on the other side of the crisis, IMO.

I HATE the Geithner pick (5.00 / 3) (#3)
by ai002h on Fri Feb 27, 2009 at 09:07:02 AM EST

I was listening to his interview the other day and he really needs to go. He doesn't realize he works for the government, he STILL thinks he works for Wall St. Seriously, you can tell in the language he uses, he sees government as a different entity entirely and that what he's doing is seperate from that. People have no idea how entangled a lot of these Fed guys are with Wall St, their neoliberal ideology is wired in such a way that makes them the servants of Wall St.

Think of it, every step of the way, Geithner has been on Wall St's side. He lobbied the adminsitration to cutback on their compensation restrictions, he fought off Axelrod and co. who wanted to nationalize the banks, he went to capitol hill and begged Barney Frank and Chris Dodd for hours to loosen the compensation ammendment added to to the stimulus bill.

It's not a surprise that the most disappointing approach of the Obama administration has been their handling of the bank crises. The stimulus bill wasn't big enough, but it was entirely a democratic bill with the exception of the AMT. The budget is the most progressive budget since WWII, with guys like Krugman and Reich saying, if passed, it will undo the past 40 years of killing the middle class. But the banking crisis has been nothing but peacemeal, unsure measures, and it all comes from Geithner. Of all of Obama's appointments, he's the one I would take back, even more than Gates.

Geithner understands the banking system and (5.00 / 1) (#7)
by Green26 on Fri Feb 27, 2009 at 09:38:17 AM EST

how Wall St. works, in my view. It will take more time to make a good assessment of how he's done. I like what's he's done so far.

As for Citibank, my view is that a government takeover of Citibank is a last resort, and would essentially ruin Citibank and reduce it's ability to lend. Citibank is so much larger than any bank that the US has taken over in the past, that I doubt the US has the resources to accomplish an overnight takeover and reopening, as it often has done with other smaller banks.

Keeping Citibank going preserves its franchise and going-concern values, keeps a takeover from causing yet another huge disruption in the financial and stock markets, and preserves some value for bondholders and stockholders.

This conversion of a portion of the US's existing preferred stock into new senior preferred stock, appears to improve the position of the US and significantly increase its ownership position. The US offer is conditioned on other preferred holders converting their stock. I believe all of this will result in Citi having a stronger capital position--for purposes of the stress test and otherwise. No new US money is being put up at this time.

It looks to me that this is a win-win situation for Citi and the US, as Citi's capital position is improved and the US's position is improved. Citi common stockholders are significantly diluted, as presumably they should be. Other changes are being made in Citi's business and governance, i.e. all dividends will cease and board composition will change significantly.

If Citi survives, and I believe it will, its stock price and value will increase significantly, and the US will recoup a huge amount of its investment--and probably make money.

Credit Default Swaps (5.00 / 1) (#13)
by gyrfalcon on Fri Feb 27, 2009 at 10:53:30 AM EST

Somebody in a comment to one of Krugman's recent blog posts said this:

"It is possible that after looking into the abyss of what happens when too big to fail-fails- the government rationally concluded the costs are unacceptable. If we nationalize, then credit default swaps are triggered.

The whole system collapses. Think Lehman times 10. After all we are talking Citigroup."

I don't know enough about the process to know whether this is right. Does anybody? If this commenter is correct and nationalization would cause the CDSes to be triggered, it could quite literally bring the entire financial system down in days.

We have to remember this is not our fathers' financial system, it's become an entirely new animal in the last 10 years, thanks to the myriad of mortgage and other credit securitizations, and the credit default swaps that guarantee them.


When the government took over Fannie and Freddie (none / 0) (#14)
by steviez314 on Fri Feb 27, 2009 at 11:00:10 AM EST

that did indeed trigger their CDSs as a credit event.

Now, triggering is determined by the credit default swaps primary dealers by some voting mechanism.

These things have to centrally cleared, traded on exchanges and offset, ASAP.


This is where some international... (none / 0) (#18)
by santarita on Fri Feb 27, 2009 at 11:09:58 AM EST

agreement could be reached to change the events of default or the remedies on the events of default or maybe just some international agreement on forbearance.


Thanks to both of you! (none / 0) (#21)
by gyrfalcon on Fri Feb 27, 2009 at 11:25:22 AM EST

Two questions.

Do you think this is, in fact, likely the reason they're shying away from nationalization?

And secondly, do either of you see any movement on the remedies you suggested-- voting (voting? They vote on this stuff?) or an international agreement on forbearance? Might the latter be on the agenda for the upcoming G-20?

Oh, and another question. How come the all-knowing Krugman et al never mention this in their ongoing push for Nationalization Now?


A Good Discussion... (5.00 / 2) (#33)
by santarita on Fri Feb 27, 2009 at 12:35:58 PM EST

of pros and cons of nationalization can be found at www.voxeu.oorg in an article yesterday by Matthew Richardson.


Superb (none / 0) (#52)
by gyrfalcon on Fri Feb 27, 2009 at 01:04:51 PM EST

This is precisely the kind of stuff I've been looking for and failing to find. Thanks very, very much. That looks like a terrific site and I'm going to go right back and browse in it a bit.

Richardson pretty much convinces me, I have to say.

Two things he emphasizes, though, that seem to me very relevant to the apparent stall we have right now in government action.

One is the absolute need for the government to have a complete, detailed picture of each bank's financial situation.

The other, which is dependent on the info, is that if a couple of institutions are nationalized, the government needs to simultaneously publish its conclusion, and the detailed reasons for it, that the others are solvent and capable of standing, even if with some degree of government guarantees, in order to prevent the panicked runs we saw in the wake of Lehman.

Let's hope this is what Geithner has in mind. If so, the delay in acting is both explained and totally necessary.

Many thanks. Great site, fascinating article.


: One will NEVER (5.00 / 1) (#64)
by Big Tent Democrat on Fri Feb 27, 2009 at 01:32:10 PM EST

happen until there is nationalization.

: My Only Quibble With That Article... (5.00 / 1) (#78)
by santarita on Fri Feb 27, 2009 at 03:19:28 PM EST

is that it doesn't really explore the range of actions that the USG can take that, if taken, would amount to taking over the bank. Bernanke said it very clearly at the hearing on Tuesday. The USG has a lot of tools that it can use to force a bank to do what the feds want. The fed doesn't need to nationalize in order to obtain effective control.

I've posted here quite a bit that I think (none / 0) (#24)
by steviez314 on Fri Feb 27, 2009 at 11:52:02 AM EST

nationalization is just a silly word. People (at least here) seem to mean it just in the sense of the government gets to control things, fire people, eliminate golf outings. But guess what, if the gov't took over Citi, that wouldn't change the asset pricing one bit.

The real question is, how big a gap is there between what the assets are worth (not just on a mark-to-market basis, but on an actual cash flow generating, performing basis) and what they are carried as on the books. Who will have to take a haircut, common stock holders (I'd say Citi trading $1 is a big haircut), preferred holders (who are losing their dividends and in some cases being made to convert to common), and/or debt holders.

I think the government is very reluctant to arbitrarily wipe out debt holders, when the banks are not currently insolvent--that is, they are cash flow positive. That would have ramifications beyond the banking industry.

If by nationalization, people mean take over the banks assets, zero out all the liabilities, a more accurate term for that is "expropriation". If that's what we mean, let's at least be honest about it.

I appreciate Krugman and Roubini having been right, but in 25 years of trading/investing, I have seen many people be right, and then not be right.

I have yet to see one proponent of nationalization tell me what their business plan is the day after they do it.


Most People Think ... (none / 0) (#27)
by santarita on Fri Feb 27, 2009 at 12:03:15 PM EST

that nationalization means that the FDIC conservatorship where the FDIC takes over assets and liabilities on a Friday afternoon and then sells the assets to another bank that opens operations again on Monday.

If it were that easy with Citi, then it would have been done already.

The more instructive example for Citi is probably AIG, where the Feds for all intents and purposes control AIG. When the feds took it over, they did remove the CEO. But I think senior management is still in place and operations continue (probably with the intent of winding up and dissolving). The feds seem to be inching towards that model with Citi.


FDIC Conservatorship (none / 0) (#39)
by BackFromOhio on Fri Feb 27, 2009 at 12:54:41 PM EST

does not mean new owner by Monday; often FDIC remains conservator/receiver while it sorts things out; can continue for very long period. But while FDIC in, no "default" actions against the bank can go forward.


Correction (none / 0) (#40)
by BackFromOhio on Fri Feb 27, 2009 at 12:55:42 PM EST

does not always mean new owner by Monday, except that one can say that conservator/receiver is "new owner."


Do You Mean That No One Can... (none / 0) (#80)
by santarita on Fri Feb 27, 2009 at 04:09:14 PM EST

enforce a contractual provision provides that supervisory actions up to an including conservatorship are events of default? Or do you mean that creditors of the bank cannot go to court to enforce an action against the bank? Like an automatic stay in bankruptcy?


Like (none / 0) (#83)
by BackFromOhio on Fri Feb 27, 2009 at 04:44:02 PM EST

an automatic stay.
And, FDIC has authority to repudiate contracts -- I'm not sure the extent of this authority or conditions for its exercise.
But BTD says FDIC will not be involved....


I do think that... (5.00 / 1) (#85)
by santarita on Fri Feb 27, 2009 at 05:48:13 PM EST

repudiating contracts on a massive scale may cause a financial system meltdown all on its own.


Repudiation of contracts (none / 0) (#90)
by BackFromOhio on Sat Feb 28, 2009 at 09:10:16 AM EST

is determined one-by-one I believe. The 'automatic stay' gives regulators breathing room to get a handle on what contracts are there, underlying financial facts, etc.


Can You Cite The Statute or Regulation... (none / 0) (#91)
by santarita on Sat Feb 28, 2009 at 10:18:43 AM EST

that provides for this automatic stay.

I read the notice on the most recent bank liquidations. Both were banks regulated by state banking agencies. They were closed and FDIC was appointed as the receiver. The FDIC reported that it will incur losses in one of $59 million. That suggests to me that the FDIC as receiver doesn't cancel contracts of the failed bank but rather pays them off.


I'll try to find you cites (none / 0) (#92)
by BackFromOhio on Sat Feb 28, 2009 at 06:05:15 PM EST

but I understand that each bank's charter determines which agency has the right to appoint the FDIC as conservator or receiver. There is an article summarizing some of the FDIC's powers at

There is another detailed summary of FDIC powers keyed to FDI Act, FDI Regs & other enumerated sources in a Sept 2008 document prepared by Gibson Dunn; a summary of the document with update for recent events can be found at:

This doc says FDIC's power to stay litigation is broader than in bankruptcy; it also says there are limitations on powers to repudiate contracts.
The above secondary sources have statutory references. I think the Gibson materials are better, but you may disagree.
Another document put out by FDIC & giving history of legislation affecting the FDIC through 1994 is at:

A glossary of FDIC term's can also be found at the FDIC website at:

Note: Yesterday I found a reference & I cannot recall where, to the effect that the FDIC's jurisdiction is based on an institution's having federally insured deposits.
I hope the above links are helpful.


: Don't know why the link button not working (none / 0) (#93)
by BackFromOhio on Sat Feb 28, 2009 at 06:11:31 PM EST

for me - so here goes:
www.law.com/jsp/articlejsp/article.jsp?id=1202425662023
www.gibsondunn.com/publications/Pages/FinancialMarketsCrisis-FDICAuthority-BankFailures.aspx
www.fdic.gov/bank/historical/managing/history3-A.pdf

You keep saying that (none / 0) (#50)
by Big Tent Democrat on Fri Feb 27, 2009 at 01:04:34 PM EST

And you are always wrong.

Citi will not be a FDIC operation and it is obvious that it wil not be.

Indeed, that is precisely why it needs to be dealt with now.

Citi should be nationalized because it is insolvent.

Unless it is nationalized it will certainly fail.

Of course it is a drastic measure but Citi is finished as a going concern for anyone who is willing to look at this clearly.


Citibank is not involvent. (none / 0) (#71)
by Green26 on Fri Feb 27, 2009 at 02:11:02 PM EST

Look at its balance sheet. Look at what the head of the FDIC said a few days ago, and was quoted on in the NY Times. If a bank is well-capitalized, by definition, it is not insolvent. Of course, things may change in the future. That's why the stress tests are being done.

"Sheila C. Bair, the head of the Federal Insurance Deposit Corporation, said on Tuesday that the nation's banking industry was safe. "All these large banks exceed regulatory standards for being well capitalized, so for right now, they're fine," Ms. Bair said on CBS television's "The Early Show."


I suggest (none / 0) (#74)
by Big Tent Democrat on Fri Feb 27, 2009 at 02:19:15 PM EST

that you misunderstand the definition of "insolvent."

If I have a billion dollars in "assets" - but those assets are really worth 100 million, but I owe 500 million dollars, I am insolvent (assuming no revenue and income streams.)

This is of course the point about Citi, iuts assets on its books are woth a fraction of what they say they are worth.


Might as well just go ahead and define the word. (5.00 / 1) (#75)
by sarcastic unnamed one on Fri Feb 27, 2009 at 02:38:04 PM EST

Insolvency means the inability to pay one's debts as they fall due.
This is defined in two different ways:
Cash flow insolvency -
Unable to pay debts as they fall due [because cash flow is inadequate.]

Balance sheet insolvency -
Having negative net assets: liabilities exceed assets; or net liabilities.
A business may be cash flow insolvent but balance sheet solvent if it holds illiquid assets, particularly against short term debt.
Conversely, a business can have negative net assets showing on their balance sheet but still be cash flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default - for instance, if it holds long term debt.
Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.

What's your basis for saying (none / 0) (#76)
by Green26 on Fri Feb 27, 2009 at 02:52:11 PM EST

Citi's assets are worth a "fraction of what they say they are worth"?

By the way, many people believe some of the lower-valued assets on the books of financial instituions will be worth much more than what they have been written down to, when the current financial crisis and economic downturn is weathered. That is one of the underpinnings of the bailout.

With the US backing banks like Citi, it is likely that most, if not all, of these banks will weather the storm, in my view.


: Let "some people" buy them then (none / 0) (#77)
by Big Tent Democrat on Fri Feb 27, 2009 at 03:16:31 PM EST

If It Is "Nationalized"... (none / 0) (#81)
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