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Familiar Trio at Heart of Citi Bailout
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Wall Street's surge yesterday suggested that the bailout helped convince investors that Citigroup would survive the crisis. But shares are still trading for only $5.95; they were above $50 in summer 2007.
In the middle of last week, as Citigroup's shares were getting pummeled, Rubin had a message for Paulson, the two industry sources said: Send a signal to the markets that the government had faith in the bank.
Citigroup, like other banks, had exposure to bad debts, including securities based on real estate loans and credit cards and other consumer debt. But it had even greater exposure to losses from overseas operations, industry officials and market analysts said. And with a recession in the global economy accelerating, some investors began to doubt whether the bank would survive.
The firm's interconnectedness pressured regulators to act. Because of Citigroup's operations in about 100 countries, relationships with a broad range of institutions around the world and about $3 trillion in assets, the firm's collapse would wreak havoc on the financial system.
"Citigroup has been known to be in a somewhat weak condition," said William A. Longbrake, who is on the board of directors of First Financial Northwest and advises financial lobbyists. "Citigroup is the definition of a bank that is too big to fail," he added.
As the outlook for the global economy began to dim in recent weeks, investors dumped shares in financial services firms. Citigroup was hardly immune. Some investors began to bet outright that the bank's shares would plummet, using a technique called short selling.
Helpless as the stock price began to fall precipitously, Citigroup executives lobbied the Securities and Exchange Commission to institute a ban on short selling. But SEC officials, who had tried to temporarily limit the practice earlier in the fall, turned down the request. The earlier ban, they believed, caused more damage than good and compelled many traders to leave the market altogether.
As the short sellers' bets on Citigroup's fall increased, some regulators said they came to believe that these traders were essentially betting against the government's willingness to intervene to rescue the giant bank.
Making matters worse, several government and industry sources said, was testimony delivered by Paulson on Capitol Hill that left many in the financial markets with the impression that the government was done with its interventions to stabilize the financial markets until the end of the Bush administration.
Treasury officials denied that Paulson ever signaled that the government was done with its efforts to back the financial markets.
By the end of the week, with financial markets in disarray, U.S. officials concluded that they needed to counter the impression that the government would not act.
With Citigroup stock at $3.77 as of Friday's close, the company's options for raising cash were dwindling fast. Its clients, as well as other banks, could have refused to continue doing business with Citi, sending the company into deeper trouble.
