Even though the Obama administration is trying to sell idea that the era of too big to fail is over, some in the market still arent buying it.
Case in point: Citigroup Inc.
Moodys on Monday said in its Weekly Credit Outlook that the Treasury Departments planned sale of its 7.7 billion shares of Citigroup this year doesn’t mean the government would remove its implicit support of the company if Citigroup were to fall into trouble again.
The likelihood of government support remains very high because of Citigroups systemic importance to the U.S. and global financial system as a major counterparty, payments and clearing agent, deposit taker, and provider of credit, Moodys said. This is important, because Moodys said it doesnt see any rating implications from the disposition of the governments 27% stake in the company. In other words, Citigroup can still continue issuing debt at levels that assume a type of government support.
Permanent government ownership of shares can be an important factor to consider when evaluating the probability of government support for a bank, Moodys said. However, in our analysis we never assumed that the U.S. governments stake in Citigroup was permanent. Instead, as noted above, our support assumptions are very high because of Citigroups interconnectedness in the global financial system and its systemic importance.
Moodys goes on to say that the greatest threat to continued government support for Citigroup and other major U.S. banks is from pending legislative proposals that would allow the government to resolve failing but systemically important financial institutions in a way that imposed losses on bondholders while still minimizing systemic risk.
This is the bill passed the House of Representatives in December and could soon advance to the Senate floor.