Citigroup woes belie Paulson's promise of banking 'stability'

Many things that Treasury Secretary Henry M. Paulson has said about the credit crunch and financial markets have come back to haunt him.

Now we may be facing a U.S. rescue of Citigroup Inc. -- just one week after Paulson assured the American people that the banking system "has been stabilized."

Citigroup’s shares dived $1.69, or 26.4%, to $4.71 today, leading another meltdown in financial shares, as investors bailed on fears that the sinking economy could torpedo the financial giant.

The plunge in financial issues helped drive the Standard & Poor's 500 index to an 11-year low.

Citigroup's stock failed to get any lift from a promise by Saudi prince Alwaleed bin Talal, who owns 4% of the firm, that he would boost his stake because he believes the shares are undervalued.

Once the government started pumping capital into banks last month, many investors assumed that the biggest institutions were at least assured of survival.

But the market clearly has major doubts about Citigroup, even with $25 billion in government capital now on its books.

That was evident today from the credit default swap market, where the annual cost of insuring against default on Citigroup’s bonds rocketed to $390,000 per $10 million of debt, from $240,000 on Tuesday, according to Reuters.

The cost surged even though the Federal Deposit Insurance Corp. has agreed to guarantee U.S. banks’ debts.

Citigroup swaps "shouldn’t be trading at these wide levels if in fact there’s a backstop from the Treasury, an implicit guarantee," Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York, told Reuters.

One week ago, Paulson was confident that investors were over the worst of their concerns about the banking system.

In an NPR interview, he said: "I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it. So I think that is a positive."

When the interviewer pressed Paulson on the idea of another major failure, the Treasury chief didn’t flinch.

"I got to tell you, I think our major institutions have been stabilized. I believe that very strongly," he said.

Photo: Treasury Secretary Henry M. Paulson at the Ronald Reagan Presidential Library and Museum in Simi Valley today (Reed Saxon / Associated Press)

Comments

[woodstock1969]

What in the world is going on? Because Citibank screwed up and therefore their stock sinks..they are placing blame on the Government?? Its more of the Bail-me-out if you know whats good for you. U know, we have a corporate jet waiting for us and we are running late to give out the $100K bonuses, so get on with the show before we have to let go some of our $250K dollared employees, and crash your economy even worse then we have been.

[PeterPatnter]

I just believe that Mr. Paulson is a worthless, stupid, incompetent blowhard.

Like his boss Mr. Bush, he is FAR over his head in his so-called "job".

[Ron]

I've gotten to the point where I believe the entire problem is based upon selective employment - capable people that are un- or under-employed and incompetent people that are employed. I quickly checked Forbes for Citigroups CEOs total, annual compensation which is said to be $573,813. all these clowns seem to be able to do is run companies into the ground. they certainly must have enough money socked away to retire, lets get rid of all of them and put people to work based on whether or not they perform. Citigroup CEO, all their executives and upper managers, and board should have at the beginning of the week if not long ago.

Vikram Pandits pay: http://people.forbes.com/profile/vikram-s-pandit/19716