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Wall Street's nervous about more bank rescues

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[November 25, 2008]  NEW YORK (AP) -- Shares of Citigroup Inc. and other financial stocks soared Monday on a bet that a long line of government-funded financial bailouts could be nearing a close. But if the last few months have taught us anything, it's that new problems always seem to crop up.

New York-based Citigroup was widely known to have worse problems than many of its peers in the financial industry even as the government began doling out the first payments to it and seven other banks from the $700 billion relief program last month.

DonutsHow much worse, though, is now a top question dogging investors. And until it's answered, it's not likely anyone will know if another major bank will need to be bailed out, or even what the government's willingness for more large rescue plans might be.

Paul Miller, a Friedman Billings Ramsey banking analyst, predicted that other banks will need government help, and "some of them are going to be very large," he said. He figures the financial industry needs as much as $1.2 trillion in new capital.

The government has agreed to guarantee risky Citigroup debt currently valued at $306 billion and also pump another $20 billion in cash into the ailing bank, on top of an earlier $25 billion injection that was part of the government's initial round of investments.

News of the rescue plan sent Citi's shares jumping $2.18, or 57.8 percent, to $5.95 on Monday and also helped spark a rally in other financial company shares, leading the Dow Jones industrials up almost 400 points, or 4.9 percent.

Still, many hard questions remain over the Citigroup bailout, including whether or not the nation's former No. 1 bank will need to need even more government money; how many losses will eventually be taken on the $306 billion risky debt being guaranteed by the government; and how much debt of comparably poor quality is held by other banks.

The answers to those questions could go a long way toward determining whether the big rally on the markets that began Friday was just an aberration or potentially the beginning of a lasting recovery for the stock market, which is still down about 40 percent from its peak about a year ago.

"They've put another finger in the dike," said Keith Davis, a bank analyst at the money management firm Farr, Miller & Washington. "I don't really understand what's going to prevent this from happening elsewhere."

Out of the eight major banks the government initially decided to give funding to in October, the worst performer in terms of stock price since Sept. 12 -- right before Lehman Brothers went bankrupt -- was Citigroup, which shed 79 percent between then and Friday.

Morgan Stanley is still down 64 percent since that time, even after Monday's rally, while Bank of America Corp. remains down 57 percent, and Goldman Sachs is down 56 percent.

Spokespeople at the other big banks declined to comment on whether their companies would want a similar deal with the government to backstop losses.

It's unlikely they would, though, unless they were in deep trouble. Citigroup was required to slash its quarterly dividend from 16 cents to a penny per share. It also will be paying the government a dividend of 8 percent on its investment, and will probably have to meet stricter guidelines for its executive pay than other institutions, analysts say.

Citigroup had large amounts of exotic financial products known as collateralized debt obligations and structured investment vehicles, which are generally trading at less than 25 cents on the dollar, assuming buyers can even be found, according to Barry Silbert, chief executive of SecondMarket, a marketplace provider for illiquid assets.

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In addition to Citigroup, the first batch of big banks that got capital from the government included JPMorgan Chase & Co., Wells Fargo & Co. (which just bought Wachovia Corp.), Bank of America Corp. (which just bought Merrill Lynch), Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon and State Street. Of these, Citi was one of the most hard-up for cash, having posted four straight quarters of losses totaling more than $20 billion.

While most industry experts say Citigroup was in worse shape than others, it's hard to quantify how much more. Analysts don't know how much sicker the so-called healthier banks are going to get as the economy deteriorates and if credit markets worsen.

Citigroup has more than $1.2 trillion in off-balance sheet assets -- mostly complicated, structured debt products that it has yet to take actual losses on. Citi has more of these than its peers, but other banks have them, too, and their value relies heavily on the health of the credit markets.

"The concern is some of these off-balance sheet activities," said Lee Pinkowitz, associate professor of finance at McDonough School of Business at Georgetown University. "Are the banks in an even worse position than we believe they're in?"

Losses could swell even more from consumer loans like mortgages and credit cards as Americans lose their jobs and watch their home values and nest eggs plunge.

"Exposure to the U.S. consumer, in some ways, that's almost an equal concern to the general debt crisis," said Donn Vickrey, co-founder of Gradient Analytics.

Before the Citi bailout, another key financial player was determined to be too big to fail -- the huge insurer American International Group Inc., which received an $85 billion bailout in September. But AIG's lifeline later swelled to more than $150 billion earlier this month when it became apparent that the insurer would need additional funds to survive.

"The definition of 'too big to fail' is changing all the time," said Sung Won Sohn, Smith Professor of Economics at California State University. "In the very weakened state of the economy that we are in, more and more institutions are qualified as 'too big to fail.'"



Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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