August 13th, 2009 
Vijaianand Last year, I posted a blog titled CITIBANK, TOO BIG TO FAIL and it has been almost 9 months now. During this interim period, we have seen lot more companies face tough battles, some went under and some survived. Even Citibank came very close to be taken over by FDIC. With the help of US government and many other investors, it still stands as big financial company.
These past experiences changed a lot and made many analyst to rethink, “Is there anything TOO BIG TO FAIL?”. After seeing many big banks, financial institution, auto companies crumble like pack of cards, the statement doesn’t hold value anymore.
During a town hall meeting on Jul 27th, Fed chairman Bernake said, “The problem we have is that in a financial crisis if you let the big firms collapse in a disorderly way, they’ll bring down the whole system. When the elephant falls down, all the grass gets crushed as well,” Bernanke added. He said he had to “hold his nose” to rescue such institutions during this crisis. As a result, Bernanke said it was his “top priority” to fix the issue of too-big-to-fail. As per him, there is nothing like a company is too big to fail. It just needs to fail graciously without affecting others. To read the full article, go to marketwatch.com
Citibank – Status quo?
Currently Citibank has it’s hands tied with U.S. government holding 40% stake(common stocks) after recieving giving $45 billion in bailout money. Vikram Pandit, CEO who took over his job at tough times is still hanging in there when many big companies vanished from the scenes. He is surviving with big hope to bring the company to his pride. Meanwhile he is named as one of the worst CEO by analyst and government is closely watching every one of his actions.
In an interview, Vikram pandit was chocked by questions which he struggled to answer. For a question, When will this crisis be over? Do you see any signs, at this point, of a recovery?
VP: What you have to understand is that, this is a significant shock to the world economy. Just think about it, when you look at the last 5, 10 years there were two engines of growth. There was the U.S. consumer and credit creation. None of those are likely to be the engines of growth going forward. The world’s looking for a new business model. It’s about new engines of growth and it’s not only about creating stability and saying that we’re out of the crisis mode. But we all have work to do as we search for what the new business model is for the world. I am optimistic about the signs that we’re seeing, suggesting that stability is arriving.
He seems to be optimistic, that is what he can do right! Click to check out the full interview. It is hard to say, the worst is over for Citibank. Citibank is under close scrutinty and they cannot make any drastic moves without their Fed’s approval. Even today(Aug 8/13/2009), they need goverment approval to pay bonuses and rasies for their energy trader who clinched millions for the company. It is going to take lot of work and patience to get out of the mess. We have to wait and watch.
Big CIT Story
This summer another big financial failure caught everybody attention without much shocking. CIT, a commercial lending institution struggling to get out trouble even after getting $2B bail out money from the government. I am sure many never heard of this company. I only heard when it showed up in the news. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing, so other lenders taking up all the slack would pose a big financial strain.
CIT has been scrambling to raise $2 billion to $4 billion after the federal government refused to bail out the company. On Jul 19th, major bondholders to keep the company out of bankruptcy with a $3 billion rescue loan, the New York Times reported. Under the deal, CIT’s main bondholders would give the company $3 billion at an initial rate of 10.5 percent, the Times reported.
A bankruptcy filing would have threatened funding for scores of small businesses across the country. It also would have wiped out $2.3 billion in federal bailout money injected into the company in December.
Right now, CIT seems to be working on many restructuring plans. The Federal Reserve put the company through its “stress test” last week and found it faced a $4 billion capital shortfall. It also suspended the dividends. Suspending the dividends on four series of preferred stock will improve liquidity and preserve capital during its restructuring, CIT said. The company also reaffirmed that it has received enough offers to complete a debt repurchase program.
There is more to come in the next week blog with final analysis and conclusion on a controversial question, “Should big companies be allowed to fail?” and Lesson learned from this crisis. Watch out…
Content sources – marketwatch.com and npr.org
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Whether it will really work or not, we all have fingers crossed to wait and watch. But whatever happens, we the ordinary consumers (low&middle class people) have to go on with our life, work our jobs, even harder than before to stay in them, make the dollar to feed our family and take care of our life. So it doesn’t change a darn things except we can only pray for our jobs to stay and prices to go down on essentials.