By Andrea F. Nuciforo Jr.
PITTSFIELD, Massachusetts
This article originally ran in The Berkshire Eagle, Op-Ed, Saturday, December 06, 2008.
On Nov. 24, 2006, the day before Thanksgiving, shares in the international banking giant Citigroup closed at 50.31. Citi investors had reason to toast the holiday season. The company had paid tens of millions of dollars in dividends to shareholders, and Citi stock values were riding high on the strength of its retail and investment banking businesses.
But the holiday cheer did not last. Just two years later, on Nov. 21, 2008, Citi shares were trading at 3.77, having lost more than 90 percent of their value. One of the most sophisticated banking conglomerates on earth was facing insolvency.
What happened? Citi’s management chose to make disastrous bets on mortgage- and consumer loan-related securities. Some of these securities, which Citi’s balance sheet carried at a value of some $90 billion in 2006, were effectively worthless by 2008. In most cases, the revenue streams that supported these assets – the periodic loan payments made by millions of borrowers throughout the world – were drying up, making it impossible for Citi to find investors willing to buy these securities.
For many Citi customers, of course, Citi’s distress was little cause for concern. The FDIC provides insurance to all US depositors up to $100,000. But the big guys – institutional investors, wealthy individual depositors, Citi executives and Citi’s trading partners – had a lot to lose. Citi’s shareholders, many of whom are corporate shareholders like insurance companies and hedge funds, began to recognize that their shares could become worthless. Corporate borrowers faced the possibility that Citi would not be able to originate new loans or continue its existing loan agreements.
That’s when the Washington, with the blessing of President Bush, Treasury Secretary Paulson and a compliant Congress, stepped in. As reported by the Wall Street Journal and Marketwatch.com, here is what American taxpayers have agreed to do for Citi.
Citigroup and the government have identified a pool of $306 billion in troubled loan-related assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies – the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. – will take on almost all additional losses. The plan would essentially put the government in the position of insuring Citigroup’s balance sheet. Taxpayers will be on the hook if Citigroup’s massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.
In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the broader U.S. financial industry bailout. Think about this for a moment: having put up more than $45 billion in cash, American taxpayers could ultimately suffer an additional $270 billion in losses resulting from Citi’s toxic investments. The treasury’s largess in favor of Citi startled even the most jaded and self-interested people on Wall Street.
The government’s rescue of Citi, while notable for its generosity, is more notable for its shortcomings. Simply put, the treasury’s plan does not provide taxpayers with the ownership, management and security that they deserve as Citi’s savior. Here are the top five requirements that the government should have imposed when agreeing to put the taxpayers at risk to save Citi.
- Taxpayers should have an ownership interest in Citi. Unlike any other recent investor, the government did not gain any meaningful ownership interest in Citi or its assets. If ownership is good enough for Alwaleed bin Talal, the wealthy Saudi Prince who obtained preferred shares in Citi in exchange for his $350 million investment last month, it should be good enough for the American taxpayer, who has $300 billion at risk.
- Taxpayers should obtain a collateral interest against Citi’s assets. The government has obtained no collateral against any of Citi’s real estate or securities. This leaves taxpayers vulnerable and unsecured should Citi fall into bankruptcy or insolvency. Whether by agreement with the treasury or by special legislation passed by the Congress, the taxpayers deserve this basic level of protection.
- Taxpayers deserve a vote in the Citi boardroom. Notwithstanding the huge government investment in Citi, taxpayers hold little sway within the company. In fact, the few Citi “shares” that taxpayers get provide no guaranteed dividend, and carry a “non-voting” designation. This should be corrected immediately, again by agreement or by special legislation.
- Taxpayers should demand new management. The government’s most puzzling misstep is its failure to change Citi’s executive ranks. The government did not demand a change in Citi’s governing board, much less seats on the board, in exchange for the taxpayer bailout. Taxpayers, to say nothing of the investing public, deserve a fresh approach to Citi’s problems, free from the myopia that brought Citi to the brink of insolvency.
- Citi must submit to strict and enforceable limitations on executive compensation. The public is understandably suspicious of huge government bailouts for financial titans. Such extraordinary moves can work only if the public trusts that they are necessary to preserve the American economy, and not geared to rewarding poor management. Thus, the government should exact substantial sacrifices from the executives that led Citi into its current crisis.
Citi has reason to give thanks this season because taxpayers stepped in to save the company from insolvency. Now that taxpayers bear the risks associated with Citi’s continued operation, taxpayers deserve the protection and operational clout that comes from being Citi’s saving grace.
Andrea F. Nuciforo Jr. represented the Berkshire, Hampshire & Franklin district in the Massachusetts State Senate from 1997-2007, and served as chairman of the Legislature’s Committee on Financial Services for eight years. He is currently Central Berkshire County registrar of deeds.
