Citigroup may end up with govt rescue after stock skids

Nov 22 | Updated: Nov 24 2008, 05:20am hrs
The US government may step in to rescue Citigroup Inc after a crisis in confidence erased half the banks stock-market value in three days, according to investors and analysts.

Citigroups $2 trillion of assets dwarfs companies such as American International Group Inc that got support from the US government this year. Treasury secretary Henry Paulson and Federal Reserve Chairman Ben S Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Incs bankruptcy in September.

Citi is in the category of too big to fail, said Michael Holland, chairman and founder of Holland & Co in New York, which oversees $4 billion. There is a commitment from this administration and the next to do what it takes to save Citi.

One option is for the Federal Reserve and US Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility, to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as $50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.

The arrangement allows the Fed to leverage the money provided by the Treasury with loans, enabling the purchase of assets worth a multiple of the money. Funding the purchases with loans makes them less onerous to the US budget.

That is the working relationship they have settled into with the Fed providing $1 trillion of the funding and the Treasury providing the equity tranche, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating companies. A similar scenario played out at Lehman, when ehief executive officer Richard Fuld declared the firm was on the right track five days before the firm went bankrupt.

The market may be implying some sort of regulatory intervention, Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients yesterday. In situations where the government has stepped in, the equity holders have not fared well.

Citigroup CEO Vikram Pandit told employees on Friday that he doesnt plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20%, to $3.77 at 4:08 pm in New York, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 pm

Pandit and chief financial officer Gary Crittenden, speaking on a worldwide conference call on Friday, also said they dont expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasnt open to the public. The call came as Citigroups board, led by Chairman Win Bischoff and independent director Richard Parsons, prepared to meet on Friday at the banks headquarters, said a person familiar with the companys plans who declined to be identified because the deliberations are private. Bloomberg