As Citigroup Inc.'s shares continue their death spiral, talk of the
banking behemoth's cloudy future weighs heavy on Wall Street's collective mind
and provides CNBC's talking heads plenty of air time. But what of
Treasury Secretary Hank Paulson and his crew? Although two months are
left in the Bush administration before President-elect Barack Obama
takes the reins in Washington, Paulson announced earlier in the week
he will no longer disperse Troubled Asset Relief Plan funds -- in other
words he's going on sabbatical until he has to brief his replacement on
TARP. However, as the storm clouds around Citi continue to grow darker portending the possibility of failure
-- an event that would test the economic definition of "too big to
fail" -- Paulson may have no choice but to wake up and take action.
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Citi's death spiral began earlier in the week when it took on its
books $17 billion in assets from a failed internal hedge fund. Of
course there are other concerns as well: credit cards, other mortgage
losses, credit problems as companies go bust. However, the trigger that
sent the markets into a flurry of sell orders was the failed hedge fund. It's widely
believed that these assets are the type that TARP was set up to buy
from banks. However, with Paulson having ruled out the toxic cleanup
job in favor of capital infusions, the market is trading Citi shares in
a panic mode. And now with shares hovering under $5 a piece -- the
threshold for institutional investors such as pension and mutual funds
to dump shares -- Citi faces a race to zero.
A Citi failure would be a systemic shock that would not only
reverberate throughout the U.S. economy, but in all likelihood across
the globe where Citi also does a great deal of business. If Treasury
swept in and cleaned up the most toxic debt, the markets might calm,
and Citi might be able to limp along selling off assets until it
regains some stability. Since it's unlikely that those toxic assets
would be acquired overnight -- after all, considerable diligence on
valuing those assets would be required -- Paulson simply announcing the
intent to do something might calm the markets come Monday morning.
In short, Paulson can't just go to sleep until Jan. 20. He has a
job to do in the meantime, and that is to continue trying to keep the
financial system on life support until the Obama administration takes
over and offers some sort of road map for the future -- a topic for
another post. Given Paulson's propensity to change his mind --
something he's done a number of times since the collapse of Lehman
Brothers Holdings Inc. -- let's hope he does so again. - Matthew Wurtzel
See related post from Dealscape
Matthew Wurtzel is the editor of Dealscape.
