Tuesday, November 25, 2008

Citigroup in BIG trouble

US authorities moved on Sunday to prop up Citigroup and prevent it from joining the growing list of financial giants felled by the spreading global economic and financial contagion.

Following a nearly 60 per cent slide last week in Citigroup’s share price that sent shock waves through global financial markets, the US Treasury department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement saying the government would invest an additional US$20 billion in the troubled New York-based lender and guarantee another $306bn of its property-backed loans and related securities.

The US government, it seemed, was committed to support financial market stability, which is a prerequisite to restoring vigorous economic growth. With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy.

Citigroup’s rescue marks the third time in as many months that Washington has stepped in to prevent the collapse of a major financial institution. It also represents a new milestone in the wholesale nationalisation of global banks that began when the crisis began gathering speed in September.

Propping up Citigroup, whose $2 trillion in assets make it America’s second-largest bank, was clearly aimed at preserving an institution whose failure would have had wider global repercussions than even American International Group (AIG), which was pulled back from the brink by a government rescue in September.

Some analysts heralded the deal as a confidence-boosting success, and that the bailout is to prevent the global financial system from collapsing. It is presence in 106 countries, including Malaysia.

Citigroup’s plight sparked a renewed flight from risk by investors. Emerging markets are being pummelled as investors move more money into US dollars and the perceived safety of US government bonds, sending the yield on US Treasuries to its lowest since 1940.Stocks in Asia and the Gulf slid yesterday.

China’s benchmark stock index was down more than 4 per cent and South Korean stocks fell by more than 3.5 per cent. Stocks fell 3.3 per cent in Bahrain and dived by 5.3 per cent in Dubai, although Saudi Arabia’s benchmark index flouted the trend by staging a 2 per cent rally.

For a while, it seemed that Citigroup might avoid the fate of smaller rivals such as Lehman Brothers, which has gone bankrupt, or Merrill Lynch, which survived by selling itself to Bank of America.

Citigroup was formed in its present shape by the merger a decade ago between Citicorp and Travelers Group. The deal included Travelers’s newly merged brokerage operations, Salomon Smith Barney, which was placed under Citi’s management. But the bank’s history goes back much further, to the founding 196 years ago of the City Bank of New York, which eventually became Citibank.

Today Citigroup has 350,000 employees servicing its 200 million customers worldwide.Citigroup had already received $25bn under the $700bn Troubled Asset Relief Programme (TARP), through which Washington has doled out more than $300bn to the nation’s banks.

Losses in the subprime mortgage market had already cost Citigroup billions of dollars in write-offs and investors and analysts were prodding the bank to sell off assets or split up to boost its share price. Soon, however, the subprime crisis began to spread to other forms of lending where Citi is a leader.

On Thursday, Citigroup’s largest shareholder, Saudi Prince Alwaleed bin Talal, said he would invest an additional $350 million in the bank, raising his stake to 5 per cent from 4 per cent.


dannalli said...

Apart from Saudis Prince, another prince from Europe who just celebrated his 60th B'day also had some shares.

When I stated working then, it was known as FNCB, having their operations at AIA,Jalan Ampang and already with an on-line real-time ATM. Their advert in the magazine was of Man in the Circle.

Local BBMB was at Wisma TAS, Melaka Street, infront of it were filled with warongs along the river where Bank Muamalat now stands.

insan, shah alam said...

even big banking institutions can collapse. if we keep on thinking that our financial institutions are not gonna be affected by the world crisis, we may take a big thumping.

Anonymous said...

it symbolises how strong we are, a minor error can cost us a lot

sedaro kau said...

kita asyik terlalu yakin bahawa bank kita takkan terjejas oleh perkembangan dunia... dan bahawasanya bank kita diterajui oleh pakar yang lurus dan amanah.

boleh percaya ke?

chiang, RAUB said...

its worrying, u know. when big banks are on the verge of collapse, its wavelength will reach the whole world.

malaysia is of no exception. no matter how good are we at managing our banking institutions, the direct impact will be there for us to detect and weather.

just hope that malaysia will be least affected. we are actually not immune to such onslaughts. it happened in 1997. dr mahathir was fast enough to introduce a counter measures. otherwise, we will MAMPUS.

but under paklah and najib, we are made to believe that we are strong enough... that our fundamentals are strong...