Government Shouldn't Dictate Bank Behavior

With at least a mini Citigroup (C) break-up plan coming to fruition, there is chatter that the U.S. government has a hand in some of these decisions. The justification is that the TARP program has resulted in the government directly injecting capital into banks like Citigroup, and as a result they are shareholders and have a large influence on guiding future operational decisions.

This is an interesting assumption because the government does not own common shares in Citigroup or any other U.S. bank, and therefore has no controlling rights like other shareholders do. The preferred shares the government bought carry no voting rights, as that is a core characteristic of preferred stock. The government does have warrants to buy common stock in the future, but those warrants are under water and as long as they are not exercised, they don’t bring with them any rights of control.

If the government really is behind much of Citigroup’s decision making, it may signal that the bank knows it will need more financial assistance down the road and therefore feels it must comply with government requests. If not, I would tell them to buzz off.

As for the break-up plan itself, does it make me bullish on Citigroup stock? Not really. While it is a step in the right direction, Citi still has one of the weakest balance sheets in the industry. It is practically impossible to know what their assets are worth and how high future losses will be. As a result, trying to accurately value the company is extremely difficult. The stock is cheap, but that alone is not enough of a reason to buy it.

Disclosure: No position in Citigroup at the time of writing, but positions may change at any time

Comments

[maelstrom:]

Bank behavior..this Eastern Bloc style Democracy Dictates what everybody should do..eat think like disike et al

Jan 14 01:57 PM

[Crocodilian:]

While you're technically correct with respect to the voting rights of Preferred stock, if you need more money -- and clearly Citibank is going to need more money-- then you have to do what your [only] potential investor wants you to do.

"Needing more money" always puts you at the mercy of whoever it is who's bringing more money (when money is scarce). Right now, the Government is the only place Citi can go a big investment . . . think Prince al-Waleed wants more Citi? I think he's got enough.

Its not correct to think of Citi as a private institution at this point. It has the legal form of a private institution, but requires public funds to survive.

Jan 14 02:15 PM

[rh13:]

I don't think any big bank would be wise to tell the Treasury secretary and the Federal Reserve chairman to "buzz off" under any circumstances.

Jan 14 02:50 PM

[commoinsens...:]

We shouldnt tell CITI what to do and we shouldnt be bailing them out. Le tthe banks fail and the strong survive. Any bank that didnt get involved in this mess in the first place should be the one to pick up the pieces. why are we rewarding these idiots that got into this mess in the first place and why arent there taxpayers revolting in the streets at the thought we might give them more. This is insane...

Jan 14 03:00 PM

[driftwood2:]

Private companies shouldn't have to take government money. However, since we all know that many of these large banks are insolvent, they have no choice. If things had been allowed to run their natural course, many of these big banks would be in bankruptcy. They know this of course. They have no choice at this point. If the government were ever to withdraw tarp funds or sell preferred shares, any of the the recipient companies would experience a run on the bank that would make what happened to Bears & Sterns look like a walk in the park.

Jan 14 05:20 PM