Shouldn’t Citigroup’s credit be a sure thing? After all, the US government has extended unprecedented support to the megabank, including a $45bn taxpayer equity buffer and a partial guarantee on some $300bn of dodgy assets. Despite that, insurance against default costs over twice as much for Citi as it does for Bank of America, its struggling rival and another big aid recipient. Even the full might of the government doesn’t seem enough to dispel investors’ worries over Citi.
Yes, analysts expect the bank to post a first-quarter loss Friday. But that doesn’t completely explain the magnitude of the market’s credit concerns. The cost to protect $10m of Citi’s senior debt against default for five years is about $570,000 per annum. The cost of similar protection for Bank of America, which analysts expect to eke out a small first-quarter profit, is around $270,000.
That’s despite a tacit recent consensus among the G20 finance ministers that governments should protect bank bondholders. Fears of a Lehman Brothers-like crisis, as well as massive losses among systemically important entities that own bank bonds, like insurance companies, have so far kept authorities from forcing lenders to share the pain.
It may be that investors now see Citi as too big and troubled for the government to support ad infinitum. After all, the bank has $232bn of senior debt, according to Barclays’ estimates, topping BofA’s $184bn and JPMorgan’s $137bn.
That figure may not seem crushing when compared with the $5 trillion of debt and guarantees the government was forced to more-or-less explicitly back when it seized mortgage giants Fannie Mae and Freddie Mac last September. But those entities have public policy mandates and the support of powerful lawmakers.
Citi doesn’t. And the government’s attempts to fight the economic downturn with massive monetary and fiscal infusions in recent months have strained its coffers and dented its once-unimpeachable credit. Investors may be right to wonder whether it will continue to see bailing out Citi’s bondholders as a top priority – and even if it does, whether it can afford to do so for much longer.