Rescuing the Citi

Was it prescient that we began the week talking about Citibank (C)? After a painful five market days, today we find ourselves discussing the same thing. Once the largest bank in the U.S. worth $274 billion, Citi is now less than 10% of it’s highest value. Investor confidence has cratered. Shocking as it seems, half of Citi’s market value was erased in 3 days. If it fails, it will be the largest bank in U.S. history to fail.

Citi is a gigantic bank. With over $2 trillion in assets, it dwarfs AIG. It also holds over $37 billion in derivatives. Many have suggested that Citi is a too-big-to-fail institution. The way the government has handled this crisis so far, I have to agree. It’s hard to conceive of a situation where Citi won’t be rescued in some form, if necessary. Yes, Citi will shed 50,000 jobs in the near future. But many of the remaining 300,000 employees should remain in some position when everything shakes out. Granted, they might have a different email address when it’s all over.

Confidence is key in the banking game. Who wants to trust their hard-earned savings to a failing institution? Even with the FDIC backstop in place, nobody wants to go through the hassle of dealing with regulators. Unless Citi can shore up confidence in its ability to stay afloat, customers will continue to pull deposits. That will force either a global begging session, an FDIC-takeover, or a fire sale. We think it will be the latter rather than the former, but it’s hard to be sure in this environment. Stay tuned for more details.