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. Questions to answer: What are some arguments in favor of continuing government support of Citigroup? Discuss who would be hurt by the bank’s failure. Is the failure of Citigroup different from that of other firms? Does the government have people to manage such a global finance enterprise? What are the counterarguments in favor of letting the bank fail? Discuss the concepts of free markets and capitalism that create competition and allow unsuccessful firms to fail. Does bailing out large banks cause them to take excessive risks on the theory that they are “too big to fail”? Please provide references.

Explanation / Answer

In 2008 at the time of bail out, US president supported the decision calling it a necessary measure to safeguard the financial system. He also maintained that government will take similar decisions in future if need arises. With the bailout, the government gained the right to buy an equity stake in the company. This support helped the shares of citygroup to rise by 58% the following day. With this support, the government hoped to restore investors' faith back in Citygroup's shares one of the largest US banks. This help was extended as a measure to nurture back to health the ailing financial system of country. Since City is one of US's largest banks, this financial support was extended as big banks are central to the economy of any country.

Not every investor was happy with the move specially the functioning of then CEO and his team. Some people linked the failure of bank to the lack of proper decision making power by the management and thought that government is bailing out an incapable management team.

The rescue magnifies the U.S. government’s burden following bailouts of insurer American International Group Inc.

Government indeed considers the group in the league of 'too big to fail' as its operations are being carried out in over 100 countries. Hence it is one of the farthest reaching bank in the world and its failure and subsequent bankruptcy will indeed create a havoc in financial sytem gloablly.

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