Citigroup (NYSE:C) Survives Only Because of Government Support

A government watchdog talking to Citigroup (NYSE:C) Chief Executive Officer Vikram Pandit said the company would be in a far more difficult position if the government if the government essentially didn’t guarantee the company. It was added the company would be viewed as far more risky by outsiders as well.

I would even go further than that, Citigroup wouldn’t survive without the government throwing taxpayer money at it, and this isn’t the first time they’ve received government help in their history.

Elizabeth Warren, chairwoman of the congressional oversight panel, said this to Pandit, “The sheer magnitude of Citigroup’s operations, and the company’s history of receiving extraordinary government support, has led this panel to an inescapable conclusion: The United States government will bear any burden and pay any price to ensure that Citigroup does not fail.”

This was an incredible admission by Warren, who was actually trying to shame Pandit and make him grovel and cave in to the demands concerning the risks he and Citigroup take in proprietary trading, which is when they use their own money for investing. The company at this time has cut back on that type of trading some, but it continues to be a point of contention between the two entities.

In a meeting between the company and the congressional oversight panel, Pandit stated the exposure to risk has been cut back significantly, and the prior leverage ratio has fallen from 18 to 1 down to 12 to 1 at this time. Leverage ratio is determined by how much debt is carried by a company in contrast to its public equity.

Some of the regulations being considered by Congress include this specific issue as it relates to all banks, where the idea of capping the leverage a company can carry at a 15-to-1 ratio. The House has already approved that in a proposal near the end of 2009.

What troubles me about this is the ongoing assumption that Citigroup should continue on in a perpetual environment that they can make whatever mistakes and decisions they want and the government will take taxpayers’ money and bail them out.

This creates the moral hazard heard about during the economic crisis as it relates to the giant financial institutions, and it’s a very real one.

What Warren is doing here is telling Pandit that big government has saved Citigroup more than once so they need to do what they’re told and be quiet about it. They wouldn’t say that of course, but that essentially is what this is all about.

Too bad Citigroup wasn’t allowed to just fail as they should have been and a good banking institution then taking over the assets worthwhile taking over. That would have gotten rid of a poorly run bank while strengthening the overall banking sector by those who know how to run their banks.

The market is the best mechanism in the world to do this, and I’ll continue to say that the government needs to stay out of the market and let the market sort things out. That’s the way we’ll have a robust and healthy financial system in the country.

As long as the government admittedly has been the reason some of these large banks have survived, it shows the reason we continue to have these problems, and will again and again no matter what regulations are thrown at them.