A day after US taxpayers saved Citi’s bacon for the second time, analysts are already talking about the next steps the company needs to take if it is to survive.
First: Swearing off gambling and chopping itself up:
WSJ: Citigroup executives acknowledged Monday that the government made it clear in weekend negotiations that it expects the company to continue to reduce its appetite for risk, and to seriously weigh more drastic actions, including possibly breaking up the company.
Gary Crittenden, chief financial officer, said in an interview that Citigroup has no “preconceptions” about its vast array of businesses. “The constituent parts could change,” he said. “We’re looking all the time to see if there are different possible combinations, either buy or sell, that make sense for the organisation.”
Mr. Crittenden declined to comment on the scenarios being examined. Executives and directors have discussed potential mergers with other financial institutions or selling major business lines, people familiar with the situation said.
“This is a reprieve, but it’s not a complete pardon,” said another person familiar with the matter, referring to the government rescue plan. “Nobody’s confused about that.”
And then there is the loss exposure the company faces outside of the $306 billion of crap assets it just dumped on taxpayers (Figurately speaking. The taxpayers just get losses. Citi shareholders get any upside). The potential losses that taxpayers haven’t yet backstopped include Citi’s massive credit card portfolio:
WSJ: The company faces swelling losses on loans that aren’t covered under the government’s loss-sharing agreement, which amounts to insurance on a $306 billion pool of assets.
The arrangement covers Citigroup’s portfolios of U.S. residential and commercial mortgages and its leveraged corporate loans, among other assets. The assets aren’t just risky ones; the government insisted that the agreement cover entire asset classes, so that Citigroup couldn’t simply dump toxic loans and securities in the lap of taxpayers.
Absent from the arrangement are Citigroup’s giant credit-card business, where defaults have been rapidly piling up, and its overseas lending operations, which also are showing signs of stress.
While the government deal bolsters Citigroup’s capital ratios, “we are concerned that losses may eventually exceed the government’s backstop,” said Standard & Poor’s equity analyst Stuart Plesser.
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