Does Obama have the legal authority to take over Citi?

From Justin Fox of Time Magazine:

FDIC chairman Sheila Bair doesn’t think a full government takeover of Citigroup and other multinational financial institutions is practical or even possible. Here are her reasons, as summarized by Pete Davis:

1. The legal authority to take over large banks does not currently extend to multinational financial conglomerates; 2. The FDIC lacks the funding to conduct such a massive bailout; 3. Other countries have regulatory oversight of these financial conglomerates too, and they may object to a U.S. takeover.

Perhaps we are getting the reason Geithner and company are reluctant to take on Citi: they have no deposit base for the feds to step in on relative to their asset base.  Remember, Citi wanted to buy Wachovia for more deposits. The domestic bank Citibank simply does not have that many deposits. The nearest Citi branch — which I use — is actually only 6 blocks from my house. But, it operates largely in the Tri-State area of New York, New Jersey and Pennsylvania and has little presence outside.  Justin Fox puts it well:

To repeat: Citigroup has liabilities of $1.797 trillion. The deposits that the FDIC has some responsibility for (up to $250,000 per depositor) add up to $241 billion. So we have this reasonably sensible system for winding down troubled banks, but when it comes to the most troubled big banking company in the country, said system only covers a fraction of the overall operation. Which leads to a couple of conclusions:

1. I get why the administration is so reluctant to take over Citi completely.

2. I don’t get why we all (I’m including myself in this) thought it was okay to allow the creation and growth of gigantic financial companies for which we had absolutely no plan for winding down in case of trouble.

And remember the problem with Banamex, which Citi owns.  The Mexicans could see Citi as state-owned.  After all, the TALF considers 25% the state-owned threshold.

This banking crisis gets more interesting by the day.

Sources How much of Citigroup could the FDIC actually take over? – Time Bana-vexed – FT Alphaville

More on this topic (What’s this?)

Citi Endgame Nigh? (naked capitalism, 2/22/09)

Read more on Citigroup, Obama’s Presidential Policy at Wikinvest

Related posts Citi: looking for as much as a 40% stake from the government Merrill and Citi are the big losers this season Citi agrees to do cramdowns David Beim: Citi is too big to nationalize My take on the latest Citigroup bailout

Read more: “Does Obama have the legal authority to take over Citi? – Credit Writedowns” – http://www.creditwritedowns.com/2009/03/does-obama-have-the-legal-authority-to-take-over-citi.html#ixzz09MQwgOIp


Originally published at Credit Writedowns and reproduced here with the author’s permission.

One Response to "Does Obama have the legal authority to take over Citi?"

  1. NFrazier   March 12, 2009 at 7:06 pm

    Here’s another possibility: using the fiscal stimulus to start a new bank.* Such a plan might:1. Circumvent the legal, accounting, and solvency snafus ensnaring the current nationalization attempts.2. Quickly provide liquidity to good businesses while letting bad ones fail in short order. (Obviously, only the most stodgy credit analysis and loan approval standards should be rigidly adhered to here. Additionally, an independent regulatory agency should be created to prevent the moral hazard of funneling taxpayer capital to corporations with aggressive lobbies…)3. End moral hazard in the US banking system and reimbursing the US tax payer. In other words, if a bank relaxes lending standards with the expectation of getting bailed out later, the tax-payer instead creates a new entity to compete with that institution precisely at its moment of greatest weakness. As market share gets transferred over to this government bank, the other bank is forced to sell its lending facilities at distressed prices to the government bank. This new government bank could be privatized at a hefty profit to the tax payer at a later time.4. Help prevent the US economy from falling into a fiscal trap, keep interest rates low, prevent the property crisis from worsening, etc.*Thanks to Mr. Rogers for this suggestion.