The U.S. government’s $300 billion-plus rescue package for Citigroup is a bold attempt at staving off a crisis in confidence not just in one of the world’s largest banks but in the global financial system as a whole. Citigroup operates in more than 100 countries including India, where it is a significant player in the non-banking financial sector too. Before the start of the financial crisis, it was the most valued of the American banks and enjoyed an iconic status. Citigroup and a few other leading financial institutions in the U.S. have adopted a universal banking model that gives them access to both retail and wholesale deposits through a wide branch network. The business model, with its attendant regulatory oversight and access to central bank funds, seemed to make them less vulnerable to the financial crisis that has claimed pure investment banks such as Lehman Brothers. Over the past year the bank was trying to fend off a crisis of the kind afflicting most other institutions by augmenting its capital from the government and external investors. Until a month ago, Citigroup not only seemed to have survived but was also encouraged by the authorities to join in the attempts to rescue other troubled institutions. However, there were lurking fears that the bank, which is holding assets of almost $1.2 trillion outside its balance sheet — including some $667 billion of securitised mortgages — would run out of cash. Those fears turned into a panic two weeks ago after the U.S. Treasury backed out of a plan to buy out troubled assets and opted instead to recapitalise the banks directly. The group’s shares plunged last week threatening to engulf the entire financial system.
Citigroup’s fall is a reflection at once of lax internal controls and the ineffectiveness of regulatory oversight in the context of a large volume of non-transparent assets. The bailout package is innovative in that it combines a relatively small capital infusion — of $20 billion — with a much larger scheme of insuring the most stressed assets, setting a floor price and making them less liquid. As the market for these securities revive, the government’s contingent liabilities may come down. After the package was announced, stocks around the world rebounded on Monday. Although the stocks of Citigroup rose sharply by 58 per cent in New York, they are still trading at just half the level that obtained in early November. This reinforces the widespread perception that Citigroup, even after the salvage operation, will have several daunting challenges to overcome. As the mix in the rescue package shows, the monetary authorities are still finding their way through the crisis and there cannot be a one-size-fits-all plan for all the troubled institutions.
6 months ago