Published November 24, 2008

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First Nationalised City Bank

By ROB COX
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A HALF-CENTURY ago, the bank today known as Citigroup merged with a rival and changed its name to the First National City Bank of New York. With its next big deal, it may need to consider renaming itself the First Nationalised City Bank. That's because, as the biggest American bank by assets quickly runs out of survival options, full or partial nationalisation looks increasingly difficult to avoid.

What went wrong? There is no one obvious illness, investors have simply lost confidence in the ability of the institution and its management to weather the crisis

What's the matter with Citi? That may seem like a dumb question. After all, the stock has fallen by a half in the past week. But to propose a cure requires a diagnosis of the problem. Yet there's no one obvious illness. Rather, investors have simply lost confidence in the ability of the institution and its management to weather the financial and economic crisis.

That creates a negative feedback loop whereby counterparties and creditors demand extra protection against a Citi failure. That's reflected in the credit default swaps market, which then kicks the stock price down a notch. The worry is that the blinking red of the share price further damages Citi's ability to fund its businesses and perhaps even leads depositors - the lifeblood of its balance sheet - to flee.

Again, there's no single event that caused this lack of confidence, but rather a confluence of them. A week ago, a report emerged suggesting that some of Citi's directors were agitating to replace chairman Win Bischoff. Citi denied the report in a manner that still left the impression that the board was divided over leadership.

Then the bank said that it would acquire US$17.4 billion in assets held by structured investment vehicles that it could not offload, and that it would cut 50,000 jobs. That's a lot of bad news - even if much of it was already known or expected. To make matters worse, chief executive Vikram Pandit's delivery of it all - in a town hall with staff - didn't inspire great confidence.

So what options does Citi have to restore faith? It can't really sell itself whole, as there are no obvious buyers. While its market value of US$22 billion puts it within reach of HSBC, US Bancorp or Royal Bank of Canada, for instance, outstanding questions over the value of the assets on its US$2 trillion balance sheet should keep sensible buyers at bay.

Citi does have some valuable businesses. But it's unlikely that any of them - from the Smith Barney wealth management arm to Mexican subsidiary Banamex - would attract sufficient interest at the moment to warrant anything more than fire-sale prices. The time to hive off businesses has passed - though it should be revisited when Citi returns to stability.

That leaves the US Treasury's Troubled Asset Relief Programme (Tarp), from which Citi has already received a US$25 billion injection of preferred stock. Unfortunately, though, another infusion on the same terms wouldn't necessarily do the trick - nor would it be easy to pull off.

For one thing, a further US$25 billion might not be sufficient to allay concerns over a balance sheet the size of Citi's - particularly if there has been any erosion in its US$880 billion deposit base in recent weeks. It would also be politically toxic, given the weak constraints of the Tarp and this week's refusal by Congress to help the car industry in a hurry.

But Tarp money could be used to take a substantial equity stake in Citi, something akin to the UK's bailout of Royal Bank of Scotland. That deal will likely leave the British government owning some 58 per cent of RBS. Through the Tarp, the Treasury could buy, say, US$50 billion of new Citi common stock. Existing shareholders could be given the right to participate too. Call it a rights issue underwritten by the US government.

Such a sizeable infusion of new capital - along with the de facto recognition that Uncle Sam is behind the systemically critical institution Citi in more or less the same way it now backs Fannie Mae and Freddie Mac - should restore confidence. And when more credible executives are put in place and eventually break the business up into manageable pieces, the government would probably even make a profit.

Published November 24, 2008

US govt may rescue Citigroup

Federal Reserve and US Treasury may create a special vehicle to purchase bad assets from Citi

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(NEW YORK) The US government may step in to rescue Citigroup Inc after a crisis in confidence erased half the bank's stock market value in three days, according to investors and analysts.

Citigroup's US$2 trillion of assets dwarfs companies such as American International Group Inc (AIG) that got support from the US government this year. Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke may favour a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc's bankruptcy in September.

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 (CPFF), to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as US$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 US$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.

Citigroup management and some board members discussed 'several options' for the company in a series of phone conversations with Mr Paulson and New York Federal Reserve Bank president Timothy Geithner last Friday, The New York Times reported on Saturday, citing unidentified people involved in the talks.

Among those options were the possible replacement of chief executive officer Vikram Pandit, a public endorsement of Citigroup by the government or a new financial lifeline, the Times said. No decisions had been taken as at late Saturday.

While Citigroup executives said that 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 chief executive officer Richard Fuld declared that 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 on Saturday. 'In situations where the government has stepped in, the equity holders have not fared well.'

Mr Pandit told employees on Friday that he does not plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 US cents, or 20 per cent, to US$3.77 in New York trading, giving the company a market value of about US$21 billion. The stock pared its loss after the close of official trading, fetching US$4.07 at 4.35 pm.

Mr Pandit and chief financial officer Gary Crittenden, speaking on a worldwide conference call on Friday, also said that they do not expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it was not open to the public.

Once the biggest US bank, with a market value of US$274 billion at the end of 2006, Citigroup has now slipped to No 5 behind Minneapolis-based US Bancorp.

To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said that the bank's balkanised culture and pell-mell management made problems inevitable. -- Bloomberg, NYT

Published November 22, 2008

Government pushes to clear credit clog

Easier loans and funding for local companies, with government backing

By CHEN HUIFEN
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AS EXCESSIVE caution on the part of bankers threatens to choke off credit lifelines to local enterprises, the government has stepped in to get loans and liquidity flowing again. It is making available $2.3 billion of funding support to all local outfits, regardless of size, to help them weather the credit crunch.

Besides small and medium enterprises (SMEs), bigger companies with more than 200 employees or fixed assets above $15 million can tap into new credit schemes from next month. Start-ups, too, will have more access to funding.

'If you go by Monetary Authority of Singapore (MAS) data for September, lending activity continues at a reasonably healthy pace,' said Senior Minister of State S Iswaran. 'But there is evidence that local banks have become more cautious in their lending. So although we may not have a credit freeze in Singapore, we are certainly feeling the impact of a credit squeeze.'

A new Bridging Loan Programme has been introduced for companies with more than 10 workers to access credit of up to $500,000.

The default risk will be shared equally by the government and the financial institutions.

'In the overall scheme of things, the package sends a very important signal in terms of the level of confidence the government places in the business community in Singapore.'
- Predeep Menon,
executive director of the Singapore Indian Chamber of Commerce and Industry

The rest of the support package will enhance existing financing programmes administered by Spring Singapore and IE (International Enterprise) Singapore, including the Local Enterprise Finance Scheme (LEFS), the Loan Insurance Scheme and the Internationalisation Finance Scheme. In those programmes, the government will take a greater share of the risk, and loan quantums will be raised.

In LEFS, for instance, the default risk carried by the government will be raised to 80 per cent of the loan sum, up from 50 per cent, if the borrower is an SME. The risk ratio will be 50-50 if the borrower is a larger company.

Mr Iswaran said the measures will help ensure local firms have sufficient resources to continue to operate, invest, trade and internationalise. Some 124,000 companies in Singapore stand to benefit from the new funding. About 107,000 of these are in services, 7,000 in manufacturing and the rest in construction.

Companies and business associations that BT spoke to hope the new funds will instill confidence in the lending system.

Predeep Menon, executive director of the Singapore Indian Chamber of Commerce and Industry (SICCI), said banks are now curtailing corporate credit lines with little regard for a client's track record or credibility.

'For smaller enterprises, the new funds will be lifelines,' he said. 'And in the overall scheme of things, the package sends a very important signal in terms of the level of confidence the government places in the business community in Singapore.'

Association of Small and Medium Enterprises (ASME) president Lawrence Leow said the package is timely, 'as economic and business conditions have deteriorated very quickly in a short time'.

'While we believe the higher loan quantums and increased government risk-sharing of defaults should stimulate financing, we hope the banks will start easing on credit and will be more willing to consider loan applications and shorten loan processing time,' he said.

Several business players called for measures to cut costs, or tailored programmes for sectors that have been beaten down.

Orient Express Lines managing director Mahesh Sivaswamy said new loan schemes will do little for his company if demand does not pick up.

Phillip Overmyer, chief executive of the Singapore International Chamber of Commerce (SICC), said he is disappointed there has been no cut in the GST rate, which he believes would help stimulate consumption.

'But this is just the first step,' he said. 'The government will probably have more things to announce in January. Having moved the Budget forward is also an encouraging sign.'

Leonard Tan, managing director of search engine solutions provider PurpleClick, hopes for a corporate tax cut.

'If the government can reduce the corporate tax for one or two years or, alternatively, allow us to pay the taxes cumulatively in later years, it could help tide us through,' he said.

The $2.3 billion funding support package is backed by a loan line of $3.9 billion. Mr Iswaran said more resources would be made available if the take-up rate exceeds expectations.

With additional reporting by Theodora Kee