Who will be the next Citi?

US current President George Bush said on 24 November 2008 that any other institutions that needs help, the US government will provide similar actions to help Citi. It has been interpreted by the market that in the future, the US government will continue to play the role of fire fighters. The implications behind those words and who will be the next Citi have been the key questions on Wall Street.

Banking Industry's Hidden Secret?

Not long ago Citi CEO Vikram Pandit repeatedly said that Citi has enough liquidity but in a snap of the fingers accepted the fund injection by the US treasury department. This viewed from another angle is that Citi has been lying all along before that. As such, investors start to suspect the other banks trustability. Other than Citi, what other secrets are the other banks hiding?

Although the fund injection news for Citi caused the US stock market to rally on Monday, but investors are still worried about the real value of the shares of the banks that they are holding on hand.

In this year, the FDIC has taken over 22 bankrupted banks. Net income from the commercial banks and savings institutions under guarantee by FDIC in 2Q is only about 5 billion USD, the lowest quarterly income since 1991 and down by 87% comparing to the same time the year before. In it, 20% of banks under guarantee by FDIC in 2Q are in losses.

Although the FDIC says that the current banks situation is not as serious during the great depression. But in the eyes of a lot of market people, when the government or the companies are repeating on the same problem, it means that behind it usually there is a hidden secret which could cause a much bigger problem. It will be like the examples as shown in Bear Stearns, Lehman Brothers and Citi.

Citi Is Not A Good Precedent

Critics also point out that by helping Citi, the US government has provided a new model on helping the banking industry. The model is to openly guarantee related industry's non-performing assets on risks from losses and tax payers paying for the costs of doing that.

According the plan to save Citi, the US government has stepped over the original framework laid down by the treasury department to inject funds and the FEDs providing credit. Till date, Citi's 306 billion USD worth of debt will be directly related to the US government. The US government will also have t share 90% of Citi's 29 billion USD worth of non-performing assets losses.

A US asset manager says that currently a lot of financial institutions need help from the US government. The current situation is over the expectations of the US treasury department and FED. A professor from Louisiana state university says that once the first case of the US government guaranteeing Citi's non-performing assets has been set, the other banks will follow such example and ask for help. According to compounded data, currently in the US banking industry, the other banks still face a 2 trillion USD worth of non-performing assets problem.

But, although with Citi as the precedent, the other banks may not be able to follow the model to get help and the US government may not help all the banks that asked for help. A US banking industry analyst points out that the US government does not wish to provide guarantee for all the banks problematic assets as it will cause tax payers to incur large losses.

Who's Next? Bank of America? Wells Fargo?

After Bank of America took over Country Wide and its 1 billion USD worth of mortgage loan assets, the performance has been weak. Currently it has over 250 billion USD worth of housing mortgage loans. Miller & Washington' Michael Farr says that from the performance of the stock price, Bank of America may be the US government's next bank to help. In January, Bank of America's share price dropped up to 50%, just after Citi. Research company Credit Sights says that if the drop in commercial and residential real estate market exceeds banks expectations, Bank of America's first grade capital adequacy ratio will drop to 1.7%, reaching the warning level.

Buffet's Wells Fargo situation is also not very good. Wells Fargo after taking over Wachovia has been busy with the latter's 120 billion USD worth of housing asset losses. Credit Sights estimates that if the turmoil in the financial market continues, Wells Fargo first grade capital adequacy ratio will drop to 6.98%.