With more than $2 trillion in total assets, Citigroup is one of the largest and

Question

With more than $2 trillion in total assets, Citigroup is one of the largest and most global banks in the world. It has more than 200 million customers in more than 100 countries and offers a vast array of financial services. While Citigroup has been a highly profitable and successful bank, in 2008 massive losses on securities related to home loans and other asset-backed securities caused negative profits and damage to its capital that threatened the bank’s solvency. The U.S. government injected more than $40 billion of new capital in an effort to prevent the bank’s failure. The government also provided guarantees on more than $300 billion of risky loans made by Citicorp.

Question:

1.    What are some arguments in favor of continuing government support of Citigroup?

2.    Discuss who would be hurt by the bank’s failure. Is the failure of Citigroup different from that of other firms?

3.    Does the government have people to manage such a global finance enterprise?

Explanation / Answer

1. In 2008 there was a global meltdown and economic recession happened. The United States was no exception as its banks had world exposure and interests in several mega projects world wide. The construction industry which was once booming suddenly collapsed resulting in unimaginable financial woes. Mega companies went bust and rows and rows of apartment block towers stood uncompleted. This resulted in huge job losses and consequently widespread home loan defaults. The US government supported Citigroup at this hour of crisis and saved it from collapsing. The crisis was not of Citigroup's making and its collapse would have created far bigger crisis than it was already in. Its collapse would have resulted in millions of depositors losing their money and would have created social anarchy besides loss of confidence in banking system. US government therefore took the right step and restored people's faith and confidence in banking system.

2. Citigroup is a financial institution which has high value depositors. The bank uses these deposits to lend out to industries and home loan buyers and earns profits for itself. In case of collapse of Citigroup, the interests of millions of depositors world wide would be in jeopardy and uncertain. The collapse will not just affect the bank's management and employees but will also affect its depositors who would be in danger to lose out their life's savings. On the other hand, failure of commercial organizations which are not financial institutions mainly affects their management and share holders who though may be in thousands but are still insignificant as compared to depositors with a bank. Hence, failure of Citigroup will cause far more misery and hardship than any other firm from a different segment.

3. Government certainly is capable of managing such global finance enterprises. The only problem is the political interference that may affect effective management. With each change of government which may often happen mid term, a new set of policies and rules may emerge. New political masters bring in their own set of favorite officials who replace the incumbents. This prevents continuity to a policy and hence officials generally play easy and do not undertake major reforms or review of operations.

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