No Such Thing As "Too BIg To Fall"

In the eyes of the world, Citibank was "once upon a time", solid like a rock. That was true, until the current financial crisis! Exactly 11 years ago, when Asia was at the peak of its financial crisis, many people were either contemplating or switching their life savings from local banks to international foreign bankers. Among the beneficiary was Citibank. In their minds then, western foreign banks were supposedly the "safe heaven", highly regulated and possessed a solid financial framework.

How times have changed! The once giant Citigroup who owns Citibank is now in financial trouble, no thanks to the billions of dollars of exposure to sub-prime and it's related toxic securities! Many people were initially holding on to the believes that they were too big to fall, just as we initially thought so on the likes of giant Lehman Brothers, AIG, Morgan Stanley, etc.

From the height of more than $50 a share in 2007, the stock price of Citigroup has plummeted to less than $4 last Friday! Alarm bells were ringing aloud as they were desperately seeking either a financial bailout from the U.S. Government or faced the possibility of being taken over or the worst possible outcome of bankcruptcy!

As expected, the U.S. Government could not afford to let them down, as this would have severe repercussions on U.S. businesses and consumers. A financial lifeline of $20 billion (in addition to the $25 billion extended earlier), coupled with U.S. Government's guarantee of up to $306billion. The plan announced calls for Citigroup to obtain US$27bil of capital by issuing preferred shares, which carry a special 8% dividend. Citigroup agreed to absorb the first US$29bil of losses on the US$306bil portfolio, plus 10% of additional losses, for a maximum total exposure of US$56.7bil. On the other hand, dividend distribution for equity shares will be reduced to only 1% for three years, unless the company obtains consent from three federal agencies, being the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Without the aid, Citigroup, along with many other corporate giants, would have fallen, irregardless of size!

On the flip side, i trust my local bankers more than anyone else!