If you listen to the media today, the bailout of Citigroup is a huge success and the stock market is being rewarded for effective, decisive action. If you listen to me, there is no justification for what happened in the market today and buyers and sellers are irrationally grabbing at whatever news they can. Tomorrow will show that in all reality it’s only a matter of time before something else dips and the market tumbles again. But, there is good news amidst the gloom and that is the surge in Citi stock up nearly 60% to close at $5.95 – much more realistic for a company the size of Citigroup, even with their problems.
Even with the bailout of Citi on the books now, it doesn’t appear that the auto-makers are any closer to getting their due share, which seems odd to me. I hope this proves to simply be posturing by the government as this to me still seems bigger and more important than the likes of AIG. The only difference, of course, being that most politicians don’t care who is in Detroit, but their buddies on Wall Street are a whole different story.
It’s difficult to imagine a world without Citigroup (Citibank, Citi Cards, Citi Mortgage, Primerica, etc.), but with their stock closing down another 26.41% today, to close at $4.71 (C), it’s also difficult, in these troubled financial times, to imagine a scenario that allows Citigroup to continue operations going in the direction that they are. Once the largest bank in the United States, Citigroup’s assets and market value have fallen over 65% in November alone. As if that isn’t bad enough, the word on the street is that government intervention or outside investment may be necessary for their survival – which is basically the kiss of death in this market.
The biggest problem here today is that Citigroup has both a liquidity and solvency issue. Thy’re working to calm their investors, but the market is already so shell-shocked from the other failures to date that these reassurances are falling on deaf ears. In retrospect, it’s easy to see how big a blow losing the bid for Wachovia was and following that with an announcement announcing the elimaination of 52,000 jobs worldwide compounded the problem from a public relations standpoint.
Most of us can clearly remember the day – way back in September – when they woke up to hear that they were loaning AIG $85 billion to keep it from failing. There was a tremendous amount of debate as analysts went back and forth about whether or not this would be good for the American people or not. Apparently AIG was too big to fail, and apparently that remains true today, but now the terms are a little different and the potential benefit to the American consumer is significantly less than it was before, and if you think that’s bad, keep reading, it gets worse.
So the original terms were pretty good – assuming that AIG could repay – but with very little fanfare the original $85 billion line of credit was supplemented by another $38 billion which was then added to additionally when AIG was allowed to sell another $21 billion of commercial paper to the US Government. These are big numbers, we’re talking about nearly $150 billion in since September, and some economists are questioning if this will be enough! But this is where it gets really good…
When did it become okay to go to the government bailout line the minute business got bad? In the past, make a bad business decision, pay the price, which might even mean closing doors. With modern day economics, some would lead us to believe that there are companies out there too big to fail.
Some of you still remember the internet bubble and subsequent popping of that bubble almost a decade ago. My own company closed its doors after some of our “new economy” customers lost their funding, resulting in non-payment on millions of dollars already spent on web development. We paid our employees and vendors the old fashioned way – we sold assets, clients, and took second jobs to make sure that we paid every dime owed. Ultimately, we closed our doors, but not one vendor was left without payment or a guarantee of payment. That’s how business used to be done. It never once occurred to us to ask the government to bail us out of our problems, and I don’t remember any other company getting a bailout either.