|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
Saudi Arabian prince Alwaleed bin Talal has come to the rescue of Citigroup with a much-needed cash injection today.
The surprise turnaround ended a two-year selloff that has wiped more than $200bn (£135bn) from the bank's market value.
The Saudi prince will increase his stake from about 4 to 5% in the coming days.
The move initially filled investors with confidence and sparked a buying spree before the bell. The shares surged 25 cents to $6.65, but then fell back to tumble by another 17.5%. Yesterday, they fell more than 22% in a single session while the stock is down more than 90% since 2006.
Based on Wednesday evening's closing price, the prince plans to invest about $349m of his fortune in Citigroup shares.
In a statement released at 9am in New York, Talal said he believed Citi's shares were "dramatically undervalued" and expressed "full and complete support to Citi management" including the embattled chief executive, Vikram Pandit.
He said the New York-based bank was "taking all the necessary steps to position the company to withstand the challenges facing the banking industry and the global economy".
Talal said he was "fully confident that Citigroup's universal banking model and global franchise will make it a long-term winner in the financial services industry".
In the short term, the latest effort to steady Citigroup has removed the risk that a sudden failure of the giant bank would send losses cascading through the financial industry.
But longer term, the new bailout could haunt regulators and taxpayers. The move ultimately may encourage banks to take more risks in the belief that the government will step in if they run into trouble.
With a recession looming, if not here already, banks big and small are bracing for more loans to sour, particularly those related to commercial real estate, autos and credit cards. Many are making fewer loans, even though the industry has received nearly $300 billion from the government.
Before long, anxious investors may start wondering which banks will be vulnerable next. If confidence fades, other big lenders will probably seek deals like Citigroup’s, in which the government has pledged to pick up potentially $290 billion in additional losses. Regulators drafted the plan with an eye to using it as a template for future bailouts.
There are other worries for Citigroup’s big rivals. Almost overnight, Citigroup went from being the sick man of the industry to an institution with an edge over its competitors. The government is guaranteeing $250 billion of risky assets and pumping an additional $20 billion into the bank.
With the government behind it, Citigroup may now be able to borrow money in the capital markets at lower interest rates than its peers.
“Citi has a decided advantage over them because of the loss-sharing agreement,” said John Kanas, the former chief executive of North Fork Bank of Long Island. While banks may hold out for now, it may be only a matter of time before they too line up, several analysts said.