Buried in the Congressional Oversight Panel’s 127-page November report, examining the ‘moral hazard’ involved in the US Government’s guarantees for financial institutions, is this tidbit:
(Footnote 193) Treasury conversations with Panel staff (Oct. 19, 2009); Federal Deposit Insurance Corporation, Responses to Panel Questions About the AGP (Oct. 30, 2009) (in its responses, the FDIC noted that “[o]n Friday, November 21, 2008, market acceptance of the firm’s liabilities diminished, as the company’s stock plunged to a 16- year low, credit default swap spreads widened by 75 basis points to 512.5 basis points, multiple counterparties advised that they would require greater collateralization on any transactions with the firm, and the UK FSA imposed a $6.4 billion cash lockup requirement to protect the interests of the UK broker dealer….”)
That would have been a blow for the beleaguered bank. At the end of October 2008, Citi had something like $63bn of cash (and “due from banks”) on its books. But presumably the FSA would have been trying to prevent a repeat of the Lehman collapse, when the London office of the investment bank suddenly found itself without cash — the New York office having transferred $8bn back to the States on the day the firm declared bankruptcy.
And yet according to the report, Citi wasn’t necessarily fearing for its existence in the last weeks of November, when Lehman’s fall was still rocking financial institutions and Citi’s shares had dropped a precipitous 72 per cent over the course of the month. Instead the bank was worried about what the market thought of its prospects for survival:
(Footnote 192) Citigroup conversations with Panel staff (Oct. 26, 2009). It is interesting to note that in discussions with Panel staff, Citigroup personnel, perhaps naturally, emphasized external elements such as market perception and share price, while government officials focused on whether Citigroup could open its doors the following Monday. In any case, the government did eventually step in — announcing a $20bn Tarp injection for the bank, plus an Asset Guarantee Program, which saw the Treasury, FDIC and the Federal Reserve agreeing to share losses on $306bn of Citi’s assets.
And those concerned that Citi simply shoved its most toxic assets into the guarantee programme — thus transferring the burden of the losses to the US taxpayer — needn’t worry.
According to Citi’s comments to the COP staff, it only shoved what the market thought were its riskiest assets:
Citigroup stated during a conversation with Panel staff that in determining the assets to be guaranteed, it included mainly “high headline exposure” categories of assets, not necessarily the technically riskiest, but the types of assets that the markets were most worried about and the guarantee of which would attract the most market attention. Citigroup also stated that it included in its initial proposal all of the assets in each of these categories in an effort to demonstrate it was not “cherry-picking” assets and to reflect moral hazard concerns. Citigroup conversations with Panel staff, October 26, 2009.
We’re sensing a Cartesian theme here.
Much more — including detail on Bank of America’s almost-participation in the AGP, plus the money market funds’ guarantee — in the full report.
Related links:
Taking out the trash at RBS – FT Alphaville
The riskless FDIC guarantee – FT Alphaville