Entries Tagged 'Bank Failure' ↓

Citigroup may be close to some sort of nationalization. Concerns came up again over the weekend amid news reports that the government was thinking of taking a larger stake in the doomed banking giant.

According to some reports, the government could convert a portion of its preferred shares into common stock, a move that would leave taxpayers with as much as a 40% stake in the institution.

Wall Street seems to think that the Obama government will not let Citigroup fail, no matter what, as shares rose 10% on Monday. The stock is still down nearly 70% for the year, however.

A number of options for exactly what the government could do with Citi seem to now be on the table:

Option 1 - Conservatorship
This is by far the most drastic measure, as it would effectively put the bank into a receivership situation where federal regulators take over the company, kick management to the curb, and divest parts of the business.

The government has already done this with mortgage financing companies Fannie Mae and Freddie Mac, and regulators also seized the troubled California bank IndyMac last summer and then sold it to private investors.

This approach has worked in other countries, like Sweden, Japan, and Finland in the early 1990s. All of those banks that were nationalized returned to profitability within five years, however the governments maintained a minority interest in some of these banks afterwards.

The downside of this option will the the fact that the bank’s debt holders and share holders would be effectively wiped out.

Option 2 - Approach it like AIG
Some in the financial industry are suggesting that what happened to embattled insurer American International Group (AIG) could end up being a model for what happens to Citi.

Last fall, the government took an 80% stake in AIG to keep it from bankruptcy. So far, the government has let the insurance company borrow about $150 billion and there were reports last week that it is in talks for even more aid.

Unlike what has happened with banks up to this point, regulators played an active role in crafting AIG’s future. The government named its own CEO after bailing out the firm and directed the company to sell off its massive portfolio of assets which included everything from an aircraft leasing to life insurance operations.

Option 3 - Do absolutely nothing
In a statement issued last week, the CEO of the American Bankers Association, Edward Yingling, said that all this talk of nationalization is keeping many willing investors away.

If the government did nothing, regulators would still have to keep a close watch on Citigroup and other troubled banks to make sure that their management team is not taking part in risky activities.

Governmental bank regulators shut two small banks on Friday, the first U.S. banks to fail in 2009, and the latest in an uptick that began last year as the faltering economy and plunging home prices took their toll on financial markets.

The Federal Deposit Insurance Corp (FDIC) said that National Bank of Commerce, in Berkeley, Illinois and Bank of Clark County, in Vancouver, Washington were closing, and other banks would take over their insured deposits.

In 2008, 25 banks were taken over by officials, up from only 3 in 2007.

National Bank had $430.9 million in assets and $402.1 million in deposits, and was assumed by Republic Bank of Chicago

Umpqua Bank will assume insured deposits of the Bank of Clark County, which had $446.5 million in assets and $366.5 million in deposits, according to the FDIC.

The U.S. Treasury Department is actively pursuing the purchase of equity stakes in many of the nation’s banks.

At a White House briefing held today, a spokesperson confirmed reports that America would soon join Iceland, Italy and the U.K.  in injecting capital directly into their failing banking systems.

The nationalization move would be made under the auspices of the $700 billion Wall Street bailout.

Although the original plan for the bailout was to have the Treasury buy damaged mortgage-backed securities from banks, the Bush administration is now saying that direct investment is considered part of the powers under the act passed last week.

Treasury of the Secretary Henry Paulson hinted at this plan on Wednesday when he gave a speech about the bailout. He said increasing investment in the U.S. bank system is a Treasury goal.