Just before the previews started at a showing of Slumdog Millionaire on Saturday night, my ear caught the two 40-something guys behind my wife and I talking about Bernard Madoff’s giant Ponzi scheme.
“That makes like 10 people we know who were caught up in this,” said one of the guys.
As I pretended to listen to what my wife was saying I focused on their conversation – hoping to hear a name I might know.
Vikram Pandit, Citigroup CEO
Late last night, the government and Citigroup came up with a radical plan to stabilize the huge financial conglomerate. The Citigroup bailout dwarfs some of the federal government’s stabilization plans for other companies, with the government planning to directly invest $20 billion in Citigroup, and agreeing to back $306 billion of their loans and securities. Why Citigroup and not Lehman? Well, Citigroup definitely falls in the category of ‘too big to fail.’
The massive financial company has over 200 million accounts worldwide, employs over 350,000 people (though is planning to lay off 50,000!), and is a major dealer in U.S. Treasury securities. The magnitude of a Citi collapse would shake up Wall Street in ways few of us could even imagine- a market earthquake that could have made October 2008 look completely rosy. So far, Wall Street seems to be responding favorably to this latest bailout, with Citigroup (NYSE: C) up 52 percent for the day. Last week, the market ripped apart Citi, with its stock losing half of its value in four days. In the past four quarters, Citi has consistently posted losses, and its consumer loans seem now as toxic as its mortgage-back securities.
How will the government pay for the losses it’s guaranteeing through public money? Citigroup will absorb ten percent of its losses, and the government has agreed to absorb the other 90 percent. First, the Treasury Department will absorb the first $5 billion in losses, the FDIC will bear the next $10 billion, and the Federal Reserve will guarantee any additional losses.
This morning, president-elect Obama announced his economic positions in his cabinet, attempting to both calm Wall Street and the larger American public.
“Right now, our economy is trapped in a vicious cycle: the turmoil on Wall Street means a new round of belt-tightening for families and businesses on Main Street,” said Obama. ”As folks produce less and consume less, that just deepens the problems in our financial markets. These extraordinary stresses on our financial system require extraordinary policy responses. And my Administration will honor the public commitments made by the current Administration to address this crisis.”
Obama’s speech came at a critical time, with the radical plan for Citigroup just announced, and increasing anxiety about unemployment, foreclosures, and the auto industry. ”The news this past week, including this morning’s news about Citigroup, has made it even more clear that we are facing an economic crisis of historic proportions,” said Obama.
Wall Street’s mood has been nervous or skittish at best during the past month and a half, and whether even the investment of billions of dollars of public money into Citigroup will continue to reassure investors remains to be seen.
Obama's Econ Experts At Press Conference This Morning