The Wall Street Journal is reporting that earlier this year the FDIC had attempted to have Citigroup’s financial health rating lowered to the point that would have resulted in Citigroup being added to the Problem Bank List. By lowering the rating on Citigroup, regulators would have been able to exert greater control over Citigroup’s management and operations. The US Government has already provided almost $400 billion of aid to Citigroup in the form of guarantees, loss sharing arrangements and capital infusions. Despite the enormous amount of aid given to Citigroup, it is still considered to be the weakest of the largest banking institutions.
The FDIC, under Chairman Sheila Bair, has become increasing skeptical of Citigroup’s current management team to implements the changes that are necessary to strengthen the bank.
The FDIC’s influence has grown in the past year because of Ms. Bair’s willingness to challenge her peers, as well as her agency’s central role responding to the financial crisis. Ms. Bair warned about the housing crisis before many of her colleagues.
The FDIC traditionally hasn’t been nearly as assertive in management of a large firm. But Ms. Bair’s agency is heavily exposed to Citigroup. The FDIC is helping finance a roughly $300 billion loss-sharing agreement with the company.
It also insures many of Citigroup’s U.S. bank deposits. Citigroup has issued nearly $40 billion in FDIC-backed debt since December, according to Dealogic, a financial-data provider.
Since late 2007, Citigroup has had more than $50 billion in write-downs and loan defaults. It’s in substantially worse shape than many of its peers, many of whom have been able to raise billions of dollars in fresh capital recently.
The Fed, in its recent stress tests of the nation’s 19 largest banks, estimated that Citigroup could face up to $104.7 billion in loan losses through 2010 under the government’s worst-case economic scenario.
In March, senior officials from the FDIC and Comptoller sparred over the confidential financial-health rating the government assigns to the company’s Citibank unit, people familiar with the matter said. The FDIC wanted the rating lowered, these people say. Banks rated a 4 or 5, on a scale of 1 to 5, are deemed “problem banks,” which means they’re at greater risk of failure.
Government officials decided to keep Citigroup off the “problem” list at the end of March.
Still, Citigroup officials believe that the FDIC will push them onto the “problem” list if they don’t remove Mr. Pandit and his team. They fear being on the list could limit Citigroup’s access to federal programs and prompt trading partners and clients to yank business.
Don’t Expect To See Citi On The Problem Bank List
Some banking industry experts as well as other regulatory agencies believe that Ms. Bair is overstepping her authority by attempting to oust the current management team at Citigroup. The Government has essentially declared that Citi is too big to fail. It is unlikely that Citi will end up on the Problem Bank List given its size and importance to the overall US economy. In addition, the government stress tests have essentially given Citi a clean bill of health, subject to its ability to raise additional capital.
The pressure on Citi by the FDIC seems to have a political motivation based on previous disagreements between Citi and the FDIC. The reality for Citi is that they will continue to face greater regulatory oversight since the Government will own almost a third of Citi after certain capital infusions are converted to equity.
In the final analysis, whatever may be gained by placing Citi on the Problem Bank List may be more than offset by undermining public confidence in one of the nation’s largest banks. Do not expect Citi to be added to the Problem Bank List anytime soon.