Page last updated at 14:45 GMT, Monday, 24 November 2008

Why does Citigroup, not Lehman, get rescued?

By Konstantin Rozhnov
Business reporter, BBC News

The US government's decision to bail out Citigroup, one of the world's biggest banks, resurrects memories of the collapse of Lehman Brothers, except that one of them is getting help while the other was allowed to collapse.

People walk into Citigroup headquarters in New York
Citigroup hopes not to repeat Lehman Brothers' fate

Citigroup has 200 million customers in 100 countries, almost $800bn (533bn) in bank deposits and $2 trillion in assets.

Last week, shares in the group fell 60% on fears the finance giant was in trouble.

The bank's management has insisted that the bank has "very strong capital and liquidity position and a unique global franchise", but this has not reassured investors.

The scenario was similar to the events that led to the bankruptcy of investment bank Lehman Brothers in September amid the global financial crisis: a sharp drop in the share price, and the potential exodus of customers, which are fatally dangerous for any bank.

But for Lehman Brothers, the US Treasury was unwilling to put more taxpayer money at risk after saving Bear Stearns, Fannie Mae and Freddie Mac.

However, Lehman Brothers' bankruptcy was a key factor in deepening the credit crisis, which later caused the Federal Reserve and other central banks around the world to inject hundreds of billions of dollars into the banking system.

'Too big to fail'

"If you think Lehman Brothers was big, Citi is several times [bigger] in terms of exposure," said Robin Farzad, a reporter for Business Week.

This proudest of US banks has been humbled: the rescue is about as close to nationalisation as it's possible to get without the state taking 100% ownership.
Robert Peston
BBC Business editor

In September, the US government announced a multi-billion dollar rescue package for AIG, the country's biggest insurance company, using the "too big to fail" formula.

Many analysts believe Citigroup, another giant whose collapse would badly hit the already jittery US financial system, is strong enough to overcome the current difficulties if it implements changes to the way it operates.

They argue it is crucial for Citigroup to find a way to boost its share price, to increase investor confidence in the bank.

The agreement between Citigroup and the US government appears to give the bank a good chance to increase its market capitalisation, which fell to $20bn on Friday. In 2006 it stood at $270bn.

Time and money

What is important, though, is why the government decided to increase its debt burden by helping Citigroup instead of trying to find a buyer for the bank, which had become a takeover target for its stronger rivals.

It does raise questions about what it means for the industry longer-term
David Forrester, Barclays Capital

If in September the US Treasury hoped Lehman Brothers would be bought and saved by a competitor, any hopes that Citigroup would be acquired were negligible.

As the financial crisis has shown little sign of abating, most financial institutions have been dealing with their own problems.

They may either have no cash to spare or have decided it is too risky to be associated with a bank that has fallen out of favour with investors.

The government could not afford to waste time trying to save Citigroup in any way other than its own bail-out.

Citigroup is much bigger and more complex than Lehman Brothers was, but it is widely believed that in the latter's case, the lack of time prevented Lehman from implementing any sale plans.

The question now is whether the bail-out will be enough to save Citigroup from further troubles.

Not all the analysts are optimistic.

"In the near term it reduces systemic risk, but it does raise questions about what it means for the industry longer-term," said David Forrester, foreign exchange strategist at Barclays Capital in Singapore.

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