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Citigroup Averts Collapse With Government Rescue Plan

November 24, 2008 at 6:20 PM EST
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In an effort to stabilize the teetering American financial giant, the U.S. government stepped up to help Citigroup by injecting $20 billion in capital and agreeing to shoulder most potential losses for the bank's high-risk assets. A New York Times reporter and economic analysts discuss the implications of the rescue.
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JUDY WOODRUFF: Well, just before President-elect Obama focused on his future economic plans, President Bush announced the latest package to deal with the threatened meltdown of Citigroup.

Under the plan, the federal government will invest another $20 billion in the bank and provide a safety net by absorbing losses from a pool of troubled mortgage-backed assets. Those securities are said to total more than $300 billion.

Eric Dash has been covering the story for the New York Times, and he joins me now.

Eric Dash, thank you for being with us. In the story you wrote today, you call this a “radical plan.” Why so?

ERIC DASH, New York Times: Well, it’s really an unprecedented step that the government is taking here. You know, Citigroup, there was a really major crisis of confidence in the company. While its executives maintained that it had a strong financial position, investors were saying otherwise and voting with their shares. They sent the stock down 83 percent last week.

JUDY WOODRUFF: Well, when the government said today that they’re going to guarantee over $300 billion in these troubled assets in exchange for an ownership stake, help us understand how that works.

ERIC DASH: Well, what the government is basically doing is providing an insurance policy for Citigroup, and Citigroup is paying for it by having the government invest in it.

And so what’s happening is the government is saying we’re going to absorb all losses over a certain level, so Citigroup has said we’re going to absorb up to $29 billion in losses, and then anything in addition to that, the government’s going to absorb the losses on. And in return…

JUDY WOODRUFF: Help us — go ahead.

ERIC DASH: … they’re going to invest the $20 billion in the company.

JUDY WOODRUFF: Help us understand why this was necessary. You wrote over the weekend, Eric Dash, about the recent history of Citigroup, the risky investments that were underway, the lack of oversight. Give us a thumbnail on that.

ERIC DASH: Well, Citigroup was really an amalgamation of a bunch of companies that had been bought up over the years and never really put together well. And the company really didn’t have a lot of good risk management practices or controls.

And so at the very time that the housing market was exploding and — booming, excuse me — Citigroup’s management team decided to plunge into it, headfirst. And when the housing market went belly-up, it started suffering massive losses.

Over the last year, it suffered some $65 billion worth of losses. And investors are now worried, what else is on its balance sheet?

So this action was to give the investors some certainty of sort of how much losses or how many additional losses investors could suffer in the future.

Plan reassures Citigroup creditors

JUDY WOODRUFF: Now, Citi was saying up until just a few days ago that everything was fine. They weren't going to need this kind of help. You also were writing about these urgent meetings over the weekend, the involvement of the incoming treasury secretary, Tim Geithner.

ERIC DASH: Well, Citigroup is one of these institutions that is just too big to fail. It's too interconnected. It has trading partners around the world. You know, it operates in 109 different countries, and it has a balance sheet of over $2.2 trillion in assets.

So if there was any company that was too big to fail, it was Citigroup. And policymakers recognized that.

And between Mr. Geithner, Chairman Bernanke, and Secretary Paulson, they had a weekend of frantic, you know, intense discussions to try to resolve the situation at Citigroup.

JUDY WOODRUFF: Well, we see that the markets today are reacting positively to this, but I know you've been talking to a lot of people in the industry. Is there a sense that this is going to do the job, this government plan?

ERIC DASH: You know, there really isn't. I think near term it does bring some stability to the situation. I think it eliminates the worst fear that a company as large as Citigroup could fail.

But at the same time, it brings, you know, new concerns. I think the fact that the government had to step in raises the issue of what economists call moral hazard, encouraging companies to otherwise take risks that they might otherwise not take because they know that the government won't let them crater.

JUDY WOODRUFF: You've also been, I know, talking -- you've been talking, as I say, with a lot of people in the industry. What's the sense, Eric Dash, about how other big banks that are out there that have the same kind of assets and that may find themselves in this same boat as Citigroup?

ERIC DASH: Well, I think other banks, you know, are facing the same economic challenges. You know, we all live and breathe the same air and we all work in the same economy. And so everyone's in, as one analyst put it to me today, everyone's in the same soup.

At the same time, some companies were managed better than others, so not everyone will face the problems, but the problem with Citigroup is -- in the government's action today, is that, by guaranteeing their losses, the government is providing them with an advantage by giving creditors reassurances that the other banks don't have.

So whether that translates into lower borrowing costs for Citigroup is an open question. And if it does, that could put pressure on some of Citigroup's competitors, and maybe they might want to be lining up for the same deal, even if they might not be in the same situation.

JUDY WOODRUFF: And, finally, what's the story on the existing management team at Citigroup?

ERIC DASH: Well, I think the story is the same old story, which is, you know, management believes it has a plan. It's the same plan that they've been talking about since at least May and at least, you know, two or three years ago under a prior management team.

And so, you know, they have been trying, they've been making progress in a very difficult environment. But at the same time, it's a really challenging economy.

And, you know, fair or not, Mr. Pandit, Vikram Pandit, the company's CEO, is going to have a lot of pressure from investors.

JUDY WOODRUFF: And he is expected to stay in place, at least for now, is that right?

ERIC DASH: He is.

JUDY WOODRUFF: All right, Eric Dash with the New York Times, thank you.

Citigroup 'too big to fail'

JIM LEHRER: Yes, thank you, Judy.

And now back to Robert Glauber and Dean Baker.

Robert Glauber, what do you think of the Citigroup deal?

ROBERT GLAUBER, Harvard University: Well, I think it's both necessary and has the right structure. Eric Dash made the right points. Citibank really is -- or Citigroup -- really is too big to fail. It's a major lender.

It owes money to individuals, to corporations, to other institutions, if it couldn't pay those -- pay back that money, the rest of these institutions are in jeopardy. So it really is too big to fail.

Look, nobody likes to see an institution which can be properly accused of excessive risk-taking, of not-well-controlled risk-taking bailed out in some way. It creates the problem of moral hazard that Eric talked about, so nobody likes to see this, but it has to be done. And to fail to do it at this point would have just sent shockwaves through the entire system.

So, like it or not, it's the right thing to do. And I think, frankly, the structure is both right and not all that revolutionary.

It's really a combination of the first part of TARP, the asset purchase part of TARP, and the second part, the equity injection part of TARP. So it really is in keeping with what was done before.

JIM LEHRER: TARP, of course, is the -- the original rescue...

ROBERT GLAUBER: Troubled assets...

JIM LEHRER: ... Troubled Asset Recovery Plan, et cetera.

Mr. Baker, do you believe that the government had to do this, there was no choice?

DEAN BAKER, Center for Economic and Policy Research: Well, it had to keep Citibank in business. I mean, he's exactly right. I mean, there was way too much at stake there. You'd see a chain reaction, and I don't think anybody would want to see -- want to see that at any point, particularly right now.

But the question is, did the government -- did we get the right deal? And, you know, we put up $20 billion in capital plus the guarantees of these bad assets, that really is enough to own the company, you know, and we don't.

I mean, I don't think we got a very good deal that way. Also, you have to ask about taking out the top management.

JIM LEHRER: You mean, if somebody other than the U.S. government put these two things on the table, that those people would have owned Citigroup...

DEAN BAKER: Basically, yes, that was pretty close to its market capitalization, as of the end of last week. So...

JIM LEHRER: So what does the U.S. government get?

DEAN BAKER: Well, I haven't been able to get the exact terms of that, but I believe we're getting I think a 5 percent -- I think it was 7 percent, I'm sorry, return on the $20 billion, which, given how risky this is for the U.S. government, that's a relatively low rate of return.

Certainly, you know, Warren Buffett a couple months ago got 10 percent when he lent money to Goldman Sachs, which is in considerably better shape than Citigroup is today, plus warrants on his money. So I don't think we got a very good return.

Also, I think it's really important, this moral hazard issue, I think it plays first and foremost with the management. Those were the people making the decisions. Those were the people taking the risks.

And if they're allowed to continue to stay in place and draw very high salaries, we're basically saying, "Go ahead, take really big risks. In the good years, you'll make tens of millions, maybe hundreds of millions. And then, when the bad years come, well, you'll still do very well."

So if we don't throw out that management or at least seriously depress those salaries, then we're giving them a green light and just saying, "Go ahead and take whatever risks you want. It's not your money. It's, one, the shareholders' money, and then the taxpayers' money."

JIM LEHRER: Mr. Glauber, what do you think of that?

ROBERT GLAUBER: Well, Jim, a couple of things. First of all, the guy at the top now, Vikram Pandit, really wasn't around, I mean, wasn't literally at Citigroup at the time most of these decisions were made. So I think throwing him out would be misplaced.

For the terms that the government got, it actually did a little bit better than Dean says. It got 8 percent on its preferred stock; it got warrants for 5 percent of ownership of the company. So it got something.

But, again, what it really got on behalf of the American people is bringing stability to the financial markets. And, frankly, that's more important. It's really the job of the government.

Some wonder about automakers

JIM LEHRER: Is it possible, Mr. Glauber, in your opinion, that the U.S. government could, if this whole thing works, that the U.S. government could come out ahead and not actually lose any money this deal?

ROBERT GLAUBER: Sure. It paid for its warrants about $10 a share. And most people remember Citigroup when it was selling for $30 or $40 a share. So of course, it could.

Remember, back in the bailout of Chrysler, the government actually made money on the warrants it got there. So it can make money here.

And, again, what it did is its job, which is to try and bring stability to the financial markets so that this recession isn't any deeper than it has to be.

JIM LEHRER: Mr. Dean, what about -- Mr. Baker, I'm sorry -- Dean -- first name Dean, last name Baker, I will get that -- what about the -- it's already been raised -- that the federal government can come up with $20 billion suddenly overnight over a weekend to take care of Citigroup, but cannot do anything, at least cannot do what the auto industry -- we just talked about that a moment ago -- the auto industry wants another $25 billion. What's the difference?

DEAN BAKER: Well, it is very striking. And, you know, one of the things that's been amazing to me is following the debate on the auto industry.

Again, I agree completely that, you know, we need a serious plan there and the chief executives clearly dropped the ball. But people have made a big deal about the United Auto Workers get $57,000 a year. That's a decent pay package.

But how upset can we be about autoworkers getting $57,000 a year, when we have executives at these banks that ran them into the ground that are getting tens of millions a year?

So, again, there seems to be a double standard here, that when you get these big financial institutions in trouble, you know, we immediately run to help them, which we do have to do, but here is the auto industry, and, you know, we had Secretary Paulson saying he can't do anything.

JIM LEHRER: Yes. So the issue, Mr. Glauber, then comes down to what the government has to do, has no alternative but to do, and when it has an option. And they have no use saying -- and I think Mr. Baker, Dean Baker, believes that no option here on Citigroup, but an option with the auto industry, just as two examples?

ROBERT GLAUBER: Well, I think Citigroup is just at the center of the financial system, and that puts them in a very, very important position, and, indeed, leads to this kind of a decision to support them.

The auto industry is very important. But, again, as the president-elect said, before the government talks about putting any money into the auto industry, it has to have a viable plan or it will be simply accused -- and rightly -- of throwing good money after bad. That's what the president-elect said, and I think he's right.

The auto industry has to come to Congress with some sort of viable and very difficult plan that's going to involve downsizing, mergers, new products, and probably some cuts in the wages for some of the people who work for them.

Tighter regulation is necessary

JIM LEHRER: All right, worst-case scenario on Citigroup, Mr. Baker. Let's say this -- the government said, "No, we're not going to do this," just like they did on Bear Stearns, and Bear Stearns went -- what would have been the impact of not doing what they did this weekend?

DEAN BAKER: Well, I think you would have seen a chain reaction of bankruptcies. You'd see, you know, real panic in financial markets. I'm not one to tout financial markets -- you might have guessed -- but it's the sort of panic that I certainly would not want to see. I think you'd see a total freeze-up of credit markets, and we'd be looking at...

JIM LEHRER: Even worse than what we already have?

DEAN BAKER: Absolutely. You know, so, again, I wouldn't dispute the need to keep Citibank in business. Again, I dispute the conditions, because, again, you know, I realize whose line I was stealing about the sheriff. It was Ken Rogoff, the former chief economist at the International Monetary Fund.

He was saying that Wall Street needs a sheriff. And in this case, you need to keep Citibank in business, but you have to be really tough on the executives, really tough on the shareholders. We have no interest in bailing them out.

JIM LEHRER: How do you feel, Mr. Glauber, about -- what chain reaction would you see, if the government hadn't acted on Citigroup?

ROBERT GLAUBER: Oh, I mean, it would have been an absolute disaster and a chain reaction that drew down other banks, financial institutions, corporations that have loans to Citicorp, and even individuals, so I think it's out of the question.

What is worth talking about is just, going forward, how you change regulation of places like Citicorp so that this doesn't happen again.

JIM LEHRER: OK.

ROBERT GLAUBER: Part of the problem was that they were allowed to do the things they did, which was excessive risk-taking, and all under the gaze of very, very strong, well-defined regulation.

JIM LEHRER: All right. We're going to talk about that, I'm sure, many, many times between now and whenever this whole thing finally gets resolved. But we can't do it right now. Thank you both very much.