the US Government buys part of a bank??
U.S. eyes large stake in Citigroup
Read the above article and reply to this blog with a “meaty” four paragraph reflection essay. Each paragraph should have at least 5 to 6 thoughtful sentences. Additional resources you can use to develop your response are the following:
The assignment is due by COB on Friday, February 27th. If you have any questions please Mr. Snee.
In the Wall Street Journal Article about Citigroup’s situation, I noticed that this situation was like most other situations with big businesses lately. Because of this economic crisis, the government has been expanding its ownership over large banks. The government may even end up with as much as 40% of Citigroup’s common stock. Citigroup’s share price went down to $2 which was an 18 year low for them. I agree that the government needs to take control of the banks’ enormous slide in share prices. Yet at the same time, I disagree because then the banks would have practically no part in keeping their businesses. Sooner or later, the government would have ownership over most or all banks.
One of the things that I don’t understand is when the article says that because of Citigroup’s low share price, investors may flee other banks including “healthier” ones. Why would they flee other banks? Wouldn’t they want to stay with other banks because they make have a higher share price? I am confused if the article will be intimidated by the government, or if they would flee other banks because the government would have a “big stake” in Citigroup. Using UK as an example, we should have the government have bigger stakes in Citigroup. Just like Lloyds Banking Group, more of Citigroup’s money would go to the country’s balance sheet, therefore providing more money for other businesses’ bailouts. After reading this section, I now firmly believe that the government should own more of Citigroup.
Instead of risking his job, Chief Executive Vikram Pandit should try to find another way out of this mess. Instead of having him make a third trip to the taxpayer trough to get some bailout money, Mr. Pandit should have his comrades help him think of a loophole. If Citigroup bribed private investors to “follow the government’s lead in converting some of those stakes into common stock”, wouldn’t many businesses question Citigroup’s actions? Instead of bribing the private investors to invest in their company, Citigroup should persuade them. Although persuade and bribe are very similar, bribing could be with money while persuading cannot. My opinion on bribing these investors is that it would be wrong and I think it’s a legal offense.
I’m not sure this is exactly what the article is trying to say, but I think that directors and other board leaders of Citigroup should not even think about stepping down from their positions. Not only would this spook the customers into thinking the banks are going to close down soon. It would also result in investors pulling their business. That would send the bank into an even worse direction than it is already headed in. If Citigroup is doing much better than they were before (Tier 1 ratios- before: 1.5% now- 11.8%), then why does Citigroup need another loan from the government? And why does everyone including this article say that Citigroup is in bad shape when in reality it is doing much better than most other businesses? In conclusion, I feel that this article has really informed me about Citigroup’s situation. One thing this article may need to clarify, though, is whether or not Citigroup’s condition is better or worse than most other businesses.
From April 28,2008 until today, the price of the Citigroup stock has dropped over $25 dollars per share. The market value has dropped from $144 billion to today’s current value of $12 billion dollars. That is $132 billion dollars that has disappeared in less then twelve months. If the U.S. government invests 40% at the current value of a little over two dollars per share and the stock goes back up to its original $25 dollars a share, the government could earn back its investment, which would be close to $100 billion dollars.
With the continued problems in the financial industry, Citigroup Inc. has been discussing with the Federal government to purchase as much as 40% of their common stock. What does this mean? This would be the first time since the great depression that the U.S. government would own part of the world’s largest financial institution. If the U.S. government owns a 40% share, they would also have a 40% voting right in the troubled company. With such a large share of ownership, the U.S. government’s ownership would cause current shareholders stocks to become even more diluted.
What does it mean to nationalize banks? It means the power to control banks is given to the U.S. government. This would also allow the government to have control of the companies stock and be able to elect new management and board of directors to set new corporate strategies. Our current financial system is run by private shareholders, which is managed by private institutions. The president believes that a privately held banking system regulated by the government is what the country needs at this time. There are advantages to nationalization. Some people feel that recapitalizing the banks is necessary to ensure the cost to bail out the banks is not borne by the taxpayers.
Any form of nationalization would probably mean the removal of current executives. So it would not reward bad behavior and mismanagement. Federal officials have been working with Citigroup executives to replace the current board of directors and top executives to ensure the company has the right team in place to ensure it future growth and profits. As in medicine doctors need to remove the cancer before they can cure the patient. The government needs to exert its power by eliminating those who got the company to where it is today and provide it with the cash needed to continue to grow its business.
The excessive loaning by Citibank and other financial institutions, cause by simple greed, caused our economic problems. All of this bad debt allowed people to get money and spend excessively. This excessive spending gave our economy a false sense of prosperity and success. This false sense encouraged even more loaning and more spending. It only takes simple common sense to know at some point you have to pay it all back.
Other companies are to blame as well. This excessive spending inflated company’s values by increasing their sales and investments into the stock market. This increased value allowed companies to borrow and loan money. This became excessive as well and ended up being more even more bad debt. Now the government wants to bail out everybody.
If the government nationalizes Citi bank, there will only be problems in the future. It’s almost as if the government planned to nationalize citi bank because the government watched it fall. They had more than one chance to help Citi bank, but the government waits until the last minute. Also if Citi bank is linked to the government, then they will have lower interest rates putting the other companies at a disadvantage. Then the other banks could possibly end up in the same position as Citi bank.
Lastly, due to the simple greed of the business owners of Citi bank, many loyal employee’s that have been working for 10+ years will lose a lot of money. Also, with the government owning 40% of the stocks people with there retirement funds in citi bank will lose a huge part of it. This means that many people will have to work for the rest of their lives. So as you can see, the nationalization of Citi bank, in my opion, would be a bad idea. If anything happens with the government after they own 40% of Citi bank, then one of the world’s largest banks is affected.
Citigroup has hit many troubles due to the economic crisis. Because of this, federal officials began supplying money for the bank, among many others. Although the whole economic mess occurred as a surprise to the public, it was no surprise that another bank would get involved. Even though Citigroup is one of the largest financial institutions, this proved to not mean a thing when it came to getting involved in the money troubles. Just recently, the bank’s shares hit an 18 year low of $2 per share. One thing many people didn’t expect was the fact the government would still deciding on the possibility of taking over this large bank.
The bank has been steadily decreasing since the infamous incident with the economy. This has caused the bank’s executives to struggle with the idea that the government may need to take a part of the ownership in the bank in order to stop the slide. It is possible the government would invest $45 billion dollars which would convert into common stock. The government would obtain those shares, and provide the institution with capital as a result. Taxpayers will not take a hit, but other share holders may see their shares diluted. Although it may not be in favor of the public, it may be one of the reliable options the bank has in order to keep running. Bank of America, on the other hand, has said they see no reason to make a move like this.
While this new gain of capital may keep the company up and running, it may not attract shareholders. In fact, it may even do the opposite to recent shareholders. Government involvement has not been a popular prospect. This may repel current shareholders, due to the government’s poor reputation. This whole prospect seems like nationalization. Still, there is no universal understanding of what nationalization constitutes as. The White House has said they do not plan to nationalize several large banks in the U.S.
The cause of this group’s downfall may be caused by different aspects of the institution. Some feel it may be the company’s CEO Vikram Pandit. The group has asked for money twice already. Some top government officials may even warn him that if a third hit to the tax payers is caused by him, it may cost him his job. Then again, it may also be blamed on the board of directors. Federal official have suggested changing some of the 15-member board. 3 directors have already announced plans to step down from their positions during the spring. Although this may not save the company, it may just help. The government’s involvement may also help, but may not be popular among the public. This tricky decision isn’t expected to be made immediately, but the outcome will surely be hard to anticipate.
It has been stated that the government of the United States will be increasing its ownership in Citigroup Bank to anywhere from 20% to 40%. This is considered nationalization. As a result to this, the government regulates more business practices. Also, the country becomes less entrepreneurial and becomes a government run country. This could be a problem because essentially, it is a step towards communism. The government would be gaining control of more and more of the citizens’ lives.
Aside from leading to communism, U.S. citizens are against the nationalization of Citigroup because recently, the government has not done such a good job with taking care of the U.S. economy. They have given numerous “bailouts” to failing banks. However, there are no positive results to show for this. The billions of dollars that have gone to these companies were used for “partying” and giving bonuses to the greedy CEOs. These worthless collections of wasted money have only put American families into debt and worsened the recession.
If the government decides to own 40% of Citigroup, worried investors will withdraw their money from even “healthy” banks, as the article states. Adding to this problem is the fact that the government’s plan for nationalization is unclear. Originally, it was said that the government would gain ownership in numerous banks. Now, that theory has been knocked down. This unclarity will cause investors to be confused and nervous about putting their money anywhere, which will cause the stock market to drop even more.
In conclusion, the government gaining ownership in Citigroup Inc. is most likely a bad idea. Although the government may beat the odds and succeed, they will probably worry the public and reduce freedom in business practices. In order for the recession to come to an end, I feel that the government should pump capital into the banks without nationalizing them. The value of one share of Citigroup is already less than two dollars. The government should not interfere so much if they want the economy to improve.
For several months, the United States has been suffering through an economic depression, which was caused by the irresponsibility of citizens, the owners of major corporations, and the government. Even worse, not only has this crisis, its affected the whole world, from Iceland to Asia. Now, in the midst of these hectic times, with foreclosures and rising unemployment rates becoming a part of our daily lives, the government is considering a drastic option: the government buying part of some of the most powerful banks in the world such as Citigroup or Bank of America. As this idea is being considered, I believe this shouldn’t even be an option. The government is one part of the country, and the economy is the other. However, with uncertainty about these banks futures having such an affect on our markets, it may be the last resort for the government to consider.
Right now, the country is in an economic crisis. I believe the government buying part of these banks is just anther one of our government’s pathetic attempts to solve one of these huge problems with a band aid. It’s time for the government to realize they can’t make everything better in a week, but also to realize something needs to be done. However, nationalizing these banks isn’t the answer. According to the article from The Wall Street Journal, the government buying part of the banks and converting it into a common stock would only cause the stock’s value to drop. However, this move would also raise the bank’s tangible common equity, making the bank stronger. Even though nationalizing these banks would have some positive effects, I still believe the harms outweigh the goods. Also, this option should never had been mentioned until it wa a last result. Right now, the government should be watching and stepping in to regulate and keep these businesses on the right track. And buying part of the business isn’t keeping the company on the right track. The government right now doesn’t even know the extent of the damage, which is why they now have to run all of these “stress-tests” on these companies. If the government wasn’t looking the other way for all these years, we wouldn’t have this problem. On the contrary, then they can’t exactly just dive in and start affecting our economy.
Since the time of Jefferson, our country’s take on the government and the economy has been laissez-faire, leave them alone. So, why are they considering mixing the two? And more importantly, why would anyone want the American Government to help the economy? Every time anyone in the government, especially Obama, tries to help the economy, the hole just keeps getting bigger. and yet, with the DOW Jones hanging on for dear life just to stay above 7,000 points, the government has been doing the same thing they have been during this disaster: sitting and watching. Sure, Obama says he is going to help, but has he really done anything? No. If Obama continues to offer a false sense of hope with vague details, he will soon lose everyone’s trust. The leader of our country can’t even give us a straight answer on where we should start, so why should they own part of the bank? Like everything else they’ve done, the government will only put us in a deeper hole. They gave out billions of dollars of our tax money to companies and didn’t even regulate it. So, why should they be in charge of owning part of the most powerful banks in the world?
In conclusion, it would be an absolute disaster if the government got involved in the huge banks such as Citigroup or Bank of America. The United States has already affected the economy all over the world, now is not the time for the government to make a huge mistake and take over now. Even though something must be done to protect Citigroup, Bank of America and other large banks, nationalizing is not the answer. The government needs to stop looking for a quick fix and realize this is an actually problem. They need to stop talking and giving a false sense of hope, and start thinking of a plan. The public needs an answer, a guideline on how we need to progress. And buying part of these banks isn’t doing either. As a last resort, it is a possible decision. But for now, we all really need to pull it together and start bringing ourselves out of the hole we’ve dug.
The economy continues to deteriorate. This time, the federal government is considering increasing ownership in struggling banks, specifically Citigroup Inc., to stop the slides. The federal government wants to take charge and not let the bank go bankrupt from losses due to recession and the housing crisis. If the government gets more than 25% of the ownership in Citigroup then it would give the government the right to make decisions and vote. The bank does not want the federal government in charge because the government is not as experienced with banks.
As of now, the government owns a 7.8% stake because of the $45 billion they gave the bank in exchange for the preferred stock. The shareholders would be in even more trouble if the government owned a bigger portion of the coporation. The more shares the government owns, the more diluted the shareholders’ stakes become. Any more ownership stake by the federal government of Citigroup Inc. could cause shareholders of other struggling banks to flee in fear of losing money. If shareholders decide to flee, then the banks’ share price can fall dramatically.
This same process went through in the UK, and now the UK government owns 43% of Lloyds Banking Group PLC. The federal government of UK also owns 70% of Royal Bank of Scotland Group PLC, which increased from 58%. I will not be surprised if in a couple of months the US government will end up owning 40% of Citigroup and Bank of America. We are headed towards the same track and if someone doesn’t take charge, the federal government will own most of the major banks.
Mr. Pandit is the CEO of Citigroup Inc. Federal officials were thinking about removing him from his position as CEO. Since a replacement is hard to find, they decided not to remove him from his position but gave him another chance. They warned Mr. Pandit that if he asks for another loan he will be fired and replaced. (Mr. Pandit asked for two loans before from the federal government.) It doesn’t seem very possible that Citigroup will be receiving another loan form the government, but it is unclear if Mr. Pandit will keep his job.
The government gave $45 billion to Citigroup in exchange for preferred shares that now has the option of being converted to common stock. Diluting the shareholders stake, which would cause investors to go to other healthier banks. The large government ownership shareholder’s confidence for company to run freely on its own would wiped out. Should the government be in the business to run banks? Governments should be regulators but their ownership might cause them to change rules and compromise their position as law makers.
Citi’s shares have fallen to record low levels, this will cause customers pull out their business and could push the bank to downward spiral. Now that the bank regulators are introducing stress tests, which dwells on TCE measurement as a gauge of banks’ health. The TCE, Tangible Common equity measures the company’s financial strength. If the TCE were to go up if the preferred stock holders converted, then shareholders would feel more confidence for their investments. The TCE is one most conservative indecators of the stability of a bank and shows Citi’s TCE ratio which is 1.5% of assets at year end, well below the “safe” level of 3%.
Nationalism would allow the government to have a large ownership over Citi. Nationalism means that the U.S government would have control over the bank. This means taking control of public shares, picking and installing new management and board of directors and setting corporate strategies. The government’s injection of more capital in this situation is more as a guarentee to sooth customers and prevent assets from leaving. It was used in the past to prop up banks in the tough times. With a huge part of the company owned by the governmen, Citi is trying to get the owners of preferred stocks to change to the common shareholders to boost its TCE measurement.
The actual issue with the banks are the “toxic assets” which are said that nationalization will not solve this issue in order to remove the asset from the banks. It is feared that the investors will run away because of total government control, as the governmen is capable of playing favorites. Therefore possibly leaving the industries in shambles. In all previous nationalizations, shareholders were wiped out. Preferred share have also been wiped out in cases like AIG, Fannie Mae, and Freddie Mac.
US Eyes Large Stake in CitiGroup:
I believe that if the federal government owns part of the two largest banks in the US, the economy will be doomed. In the past, the government hasn’t dealt with the economy well, so if they own 25%-40% OF CitiGroup or Bank of America, then the economy will most likely suffer, more than it is suffering now. CitiGroup, however, thinks that it is necessary that the government take ownership, and so do other bank owners. There have been no talks about nationalizing inside Bank of America, so I would take that as a good sign. Nationalizing the banks would probably be bad for business. Buying Merrill Lynch was a bad choice for Bank of America, but I guess they had no other choice, with all the pressure from the federal government.
I don’t understand why the government would want to replace the current CEO of CitiGroup. The article did mention a “third trip to the taxpayers”, which implies that Pandit might be taking money from the taxpayers, using it all up, then going back to the taxpayers for more money. Fortunately for Pandit, there are a scarce amount of qualified replacements. Also, since CitiGroup hasn’t been receiving additional capital, Pandit’s replacement is not verified. Other than Pandit, three members of the board plan to step down later in the year. There is always the possibility of government workers taking those jobs.
CitiGroup plans to convert $45 billion held in shares into common stock. Taxpayers wouldn’t be hurt in this move, but shareholders would see their shares as diluted. Shareholders are also afraid that their shares might be further diluted due to the low share prices. The government’s move to own part of the banks could seriously backfire, which would not only affect the US, but the entire world. The sad thing is the moral hazard coming from all of the plans from the government would put us into even more danger, like the bailout set on housing. Santelli had a point with the moral hazard of the housing bailout, and I completely agree with him. It’s not fair that people who fairly pay off the mortgage are given less of a bailout opportunity than those who pay off mortgage unfairly. The government doesn’t even listen to taxpayer’s complaints on all this.
The measurement of the “health” of banks is also off. CitiGroup appears healthy due to Tier 1 measurements, but their TCE (tangible common equity) ratios say that they are extremely unhealthy. It looks to me as if CitiGroup is just trying to cover up the problems going on with the company with the Tier 1 measurement. I think that a bank should gloat about their healthiness with both measurements, to show that they are really healthy. I wonder if Bank of America is facing similar problems. Bank of America seemed to be the healthiest bank in the US, before they bought Merrill Lynch. Even though the government is focused on CitiGroup, I predict that there will definitely be plans to own part of Bank of America.
On Monday February, 23 Wall Street Journal wrote an article about talks of the government owning Citigroup Inc. This is because as of late Citi bank has been severely struggling. The talk has not even been that the government would own only a small part, but instead the government would be, “…substantially expanding its ownership of the struggling bank.” Substantially expanding is also known as the government holding up to 40% of Citigroup’s stock. The bank executives are not so pleased and are hoping that the government will only own about 25%.
Many people are on the fence about this event occurring. Some say that by doing this the government will have too strong an influence over finance, that they shouldn’t be delving into. Other points against the government are that the government watched this happen and now they’ll be able to fix this? Not so likely. People think that the government will make things worse not better.
The people of America are not the only ones worried. More nervous are the actual shareholders of Citigroup. Shareholders are nervous that, “…their stakes might be further diluted.” They also fear that when people find out that the government is involved, they’ll quickly switch to other banks. Citigroup executives and board of directors are worried as well. Many people have been speculating that the government will try to own other banks but representatives of the White House deny these claims.
I personally believe that the government should not take over the banks. Nationalization is bad and to permit a free market the government should not get involved. I believe that that would just make things worse and much more confusing. If the government does want to help struggling banks then they should not interfere so drastically. My advice is to see what happens and if things get worse, then interfere.
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