The White House's Citigroup problem

The government says all the big banks are "well-capitalized." But if that's true, why is it throwing another lifeline to the biggest?

By Andrew Leonard

Published February 27, 2009 2:55PM (EST)

Help me out on this one:

On Wednesday, the U.S. government stated, without equivocation:

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.

But on Friday, the U.S. Treasury announced that it was agreeing to Citigroup's request to convert a portion of its existing stake of preferred Citigroup shares into common equity, matching "dollar for dollar" similar agreements by Citigroup's big private investors (i.e. the Government of Singapore Investment Corp. and Saudi Prince Alwaleed Bin Talal.) As the Wall Street Journal observed, the announcement "is an acknowledgment that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't been enough to stop the bank's slide."

The deal doesn't represent the infusion of new capital but will raise the government's ownership stake in Citigroup to 36 percent,and increase taxpayer vulnerability, since common equity holders are the first to lose out if a corporation goes bankrupt. In return, Citigroup will reportedly shake up its board of directors, at Treasury's request, but CEO Vikram Pandit will retain his job.

So here's what I don't understand. How can Citigroup be considered "well-capitalized," if it needs to engage in these maneuvers? The new administration has been forthright on many issues, but if the White House is going to keep talking about transparency and accountability, it needs to explain why it can on the one hand declare that all the big banks are solvent, while on the other hand, coming once again to the rescue of Citigroup.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

MORE FROM Andrew LeonardFOLLOW koxinga21LIKE Andrew Leonard

Related Topics ------------------------------------------

Globalization How The World Works