The Citi Rescue: On Our Way to Nationalized Banking?

So this morning's big story is the Government's rescue of Citibank (C), let's take a look at various stories on the situation, starting with coverage from the WSJ:

(From the WSJ): "The federal government agreed Sunday night to rescue Citigroup Inc. by helping to absorb potentially hundreds of billions of dollars in losses on toxic assets on its balance sheet and injecting fresh capital into the troubled financial giant.

The agreement marks a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions.

If the government's rescue plan is a success, it could help bring stability to the entire financial system. If it doesn't, even deeper doubts about the industry's future could spread.

After a weekend of marathon talks between Citigroup executives and top federal officials, the parties late Sunday night nailed down a package in which the government will help protect the company from its riskiest assets.

Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies -- the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. -- will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

The plan would essentially put the government in the position of insuring a slice of Citigroup's balance sheet. That means taxpayers will be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour."

When I read the news the first thing that came to mind was that Citibank's attempt to take over Wachovia was undoubtedly motivated by the desire to not only acquire Wachovia's deposits, but to obtain loan guarantees from the Feds that would've undoubtedly have spilled over into Citibank's current balance sheet as well. All of this begs the question of just how mindful was Citi of their financial situation (or how bad things could get) if their stock price continued to fall, the credit crunch worsened, etc? Because even with the guarantees the combination of Citi and Wachovia would've probably have been disastrous.

Now with that being said let's not forget that the Government's rescue doesn’t prevent Citi from continuing to lose money, doesn't prevent loan losses from piling up, etc, etc, in fact a recent analysis from the FT's Alphaville Blog suggests that things could still get worse for Citi in spite of the rescue.

The overall premise of the argument is rather simple: Citi is so overleveraged the financial impact of the U.S. Government rescue simply falls short of what is needed to prevent additional, and more dire consequences from occurring. Not to add more doom and gloom to the equation but let's not forget that in many respects the overall financial system is in the same boat.

Going back to the Government rescue itself for a moment: how much more money does the Government have to spend, how many more 100s of billions worth of loan guarantees do they have to agree to before we just admit that we're moving towards a near complete (if not total) nationalization of our overall banking system?

Furthermore if we are indeed headed in that direction then "some" benefit needs to be directly funneled to the taxpayer, because on a go-forward basis I'm sure that millions of Americans are going to feel foolish paying their Citibank Auto Loan/Credit Card/Mortgages, etc, knowing that they're potentially on the hook (on an individual basis) for roughly $3k worth of Citibank's future losses.

You can read the Financial Times coverage of the situation here, and read a copy of the FDIC's statement on the issue here.

Sources

The WSJ: "U.S. Agrees to Rescue Struggling Citigroup" -- David Enrich, Carrick Mollenkamp, Matthias Rieker, Damian Paletta and Jon Hilsenrath -- November 24, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.