Citi bailout adds to banks' credibility problem

By Joseph A. Giannone - Analysis

NEW YORK (Reuters) - Major U.S. banks have a credibility problem.

Citigroup Inc's repeated assurances that it did not need additional capital, followed by its quick about-face in accepting billions of dollars in aid from the U.S. Treasury, has many investors wondering what other banks are hiding.

"The biggest question is what, as the owner of bank stocks, do you really own?" said Timothy Ghriskey, chief investment officer at Solaris Group. "It's tough to say this won't happen again."

He added, "Financial institutions are leveraged companies, and any time you have a highly leveraged situation, it is based on faith and trust."

After long insisting it was strong enough to weather plunging markets, Citigroup agreed on Sunday to its second U.S. government bailout package in two months. The bank is selling $20 billion of preferred stock, slashing its dividend and granting warrants.

Citigroup will unload most of the potential losses from $306 billion of risky assets to taxpayers.

One immediate result of Washington's bailout was a relief rally on Wall Street. The Dow Jones industrial average climbed nearly 5 percent on Monday. Shares of Citibank, which plunged 60 percent last week, climbed 58 percent on Monday to end at $5.95 on the New York Stock Exchange.

"Obviously, our stock price was under a lot of pressure last week, and we wanted to try to address that," Citi Chief Financial Officer Gary Crittenden told Reuters in an interview on Monday.

Yet the flip-flop is the latest in a series by U.S. banks this year, whose assurances of safety and soundness have been followed soon after by bailouts and rescue financing.

These episodes cast further doubt on statements made by banking executives and, investors said, could hurt the next financier that finds itself under the gun.

MORE CHINKS IN CONFIDENCE

"Each time the government or companies admits to a problem, it creates further chinks in what confidence is left," said David Dietze, who manages money at Point View Financial Services in Summit, New Jersey.

Back in March, Bear Stearns CEO Alan Schwartz and other executives insisted the No. 5 securities firm had ample capital and liquidity, only to see hedge funds drain the firm's cash in a matter of days. Bear ultimately was sold to JPMorgan Chase at a fire-sale price of $1.5 billion and a $29 billion government backstop.

Lehman Brothers CEO Dick Fuld and other executives contended the No. 4 Wall Street bank had plenty of capital and solid assets, waging a war of words with critics who accused it of inflating the value of its illiquid assets. By mid-September, the firm lost the confidence of trading partners and collapsed into bankruptcy.

Likewise, Merrill Lynch chief John Thain repeatedly said the big brokerage had raised more capital than it needed, yet Lehman's woes showed the vulnerability of a balance sheet burdened by mortgages and other hard-to-trade debt. Merrill rushed into the arms of Bank of America Corp.