New York is gearing up for the daddy of all crises; keeping Citibank alive. The next problem comes when the rest of the world, led by China and Japan, tells the US that there is not enough money in the world to fund these rescues, so Americans will have t
The US sharemarket might have had a strong rally in the closing hour of trading at the weekend, but everyone I know in New York is bracing themselves for what may be the daddy of all crises – the battle to keep Citibank alive.
Regarding Citibank, I find it almost inconceivable that I should be speculating on such an event given the size and scope of the Citibank organisation, which has $75 billion in tier-1 capital on its books and revenue of about $100 billion.
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But it was significant that despite the big late session rally on the US sharemarket, Citibank shares did not rise on Friday – indeed they fell US90¢ to $US3.80. At one stage during the session Citibank shares had edged up above $5 but they could not hold.
Citibank shares have fallen from $US35.29 to $US3.80 and its market capitalisation is just above $US20 billion – just one quarter of tier-1 capital. It is an astonishing fact, but now Commonwealth Bank has a larger market capitalisation than Citibank.
In the US, when a share price falls below $5 it can have dramatic consequences. A large number of American institutions are not allowed to hold shares that are priced less than $5 for an extended period. In December and January there will be an avalanche of forced selling of Citibank shares.
Just as bad, many American institutions are not allowed to lend to companies with shares that are priced under $10. That means that deposits will come under pressure.
Clearly the market is expecting more Citibank write-downs, but a fall below $5 shows that there is a degree of panic selling.
Part of the problem is that too many American CEOs of large companies simply do not have the culture necessary to handle the crises they are facing. Last week we saw the apparently feckless CEOs of Ford, Chrysler and GM all take their corporate jets to Washington to ask for help. The fury in the Congress over this arrogance by the motor giants is understandable. But Citibank is no better.
Citibank is going to pay executive bonuses, despite sacking 50,000 people. Citibank has a lot of good executives who are working very hard, but bonuses are not normally paid when a company is so close to disaster. Citibank keeps saying that the company will not sell assets.
Goldman Sachs is under great pressure to acquire Citibank and clean out the company. It has so far refused because it fears the level of write-downs required and believe that carving up Citibank will not be a pleasant experience. But if Citibank fails, the repercussions will be a hundred times greater than Lehman, so it has to be propped up. Goldman may have no choice, but it will require loss insulation from the Government.
The problems of Citibank mean that even if it is saved – and I am sure it will be – it will further contract the amount of credit available to keep American business and consumers active. In the process, it will increase the likelihood of the triggering of trillions of dollars of liabilities in synthetic CDOs.
All the US politicians are talking about bigger and bigger spending to overcome their problems. And this is what will herald the need to increase US taxes. At a recent Reuters Global Finance Summit, former Goldman Sachs chairman John Whitehead said America’s problems will take years to solve and will burn trillions of dollars.
Whitehead points out that at this stage the only proposals on the table involve increasing the US deficit.
Whitehead said: “Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of US government bonds.
“The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favoured a number of new programs, all very costly and all done by the Government.”
Whitehead said that he is concerned that no lawmakers are against these new spending programs, yet none will stand up and call for higher taxes.
“’I just want to get people thinking about this; and to realise this is a road to disaster,” he said.
This article first appeared on Business Spectator