Citigroup’s Collapse


CITIGROUP’S COLLAPSE….The New York Times explains the proximate cause of Citigroup’s imminent demise:

The current turmoil can be traced back to the last weekend of September, when it sought to reassert itself by swallowing Wachovia, the stricken bank based in Charlotte, N.C., whose vast deposit base would have turned Citi into one of America’s dominant lenders.

As the global financial crisis drove Wachovia toward collapse, the government frantically engineered their marriage. At a bargain price of $1 a share, Vikram S. Pandit, Citigroup’s chief executive, was happy to oblige: The deal would have greatly enhanced Citi’s retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions in write-downs on bad mortgage loans and related securities.

But like so many other things for Citigroup over the last several years, it fell apart. Less than a week later, Wells Fargo, the powerful San Francisco-based bank, swooped in with a higher offer. Citi was left in the lurch, without a business that was vital to its future.

And why was Wells Fargo able to swoop in? You remember the Treasury notice a few weeks ago that modified Section 382 of the tax code, don’t you? Pretty much every tax attorney in the country thinks the change was illegal, but Treasury went ahead with it anyway:

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed “the Wells Fargo Ruling,” could be worth about $25 billion for Wells Fargo.

I’d like to hear more about this before jumping to any conclusions. Citigroup’s problems run deeper than merely the failed merger with Wachovia, after all. Still, if these two stories are right, it was the sudden and illegal change in Section 382 that allowed Wells Fargo to conclude their deal with Wachovia, and it was the loss of Wachovia that sparked the downward spiral of Citigroup, one of America’s three big money center banks. Was this yet another own goal from the Treasury Department?

THANK YOU.

We recently wrapped up the crowdfunding campaign for our ambitious Mother Jones Corruption Project, and it was a smashing success. About 10,364 readers pitched in with donations averaging $45, and together they contributed about $467,374 toward our $500,000 goal.

That's amazing. We still have donations from letters we sent in the mail coming back to us, so we're on pace to hit—if not exceed—that goal. Thank you so much. We'll keep you posted here as the project ramps up, and you can join the hundreds of readers who have alerted us to corruption to dig into.

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate

Share your feedback: We’re planning to launch a new version of the comments section. Help us test it.