Documents recently released by the Financial Crisis Inquiry Commission show how close Citigroup and Morgan Stanley came to collapse, according to a New York Times Dealbook column by Susanne Craig and Ben Protess entitled “New Details Emerge About Morgan Stanley and Citi in the Crisis.”
Citigroup was in desperate need of cash infusions from the government during the crisis. Here was the FDIC’s take:
“In short, I will characterize the liquidity and confidence situation as negative and deteriorating such that viability may be threatened without outside support,” a Federal Deposit Insurance Corporation official, Christopher J. Spoth, wrote of Citigroup in an e-mail on Nov. 21, 2008, to FDIC chairwoman, Sheila C. Bair. Shares of Citi fell 60% the week ending November 21, 2008. Citi was bleeding cash and its customers were panicking. Counterparties like UBS were backing away.
That weekend, FDIC directors met to determine whether Citigroup’s apparent death spiral posed a systemic risk. “In hindsight, I think there have been some systemic situations prior to this one that were not classified as such,” John M. Reich, an FDIC director, was quoted as saying according to a transcript of the meeting. “The failure of IndyMac pointed the focus to the next weakest institution, which was WaMu, and its failure pointed to Wachovia, and now we’re looking at Citi, and I wonder who’s next.
FDIC directors decided that Citigroup should be considered systemically important to the American financial system. Regulators intervened the following day.
Treasury and the FDIC agreed to provide protection against large losses on loans and securities backed by residential and commercial real estate and other assets.
Morgan Stanley was also on shaky ground before receiving a cash infusion in October 2008 from Mitsubishi UFJ Financial Group of Japan. “Morgan is the ‘deer in the headlights’ and having significant stress in Europe,” Amy White of the Federal Reserve Bank of New York reportedly wrote in a September 19, 2008 e-mail to several senior officials of the New York Fed, including its then-chairman, Timothy F. Geithner, currently the Treasury secretary.
“It’s looking like Lehman did a few weeks ago,” Ms. White wrote. That same day, Morgan Stanley saw $22 billion in outflows from its prime brokerage unit, according to the article.
Today, both Citigroup and Morgan Stanley say that they are fundamentally different companies than they were during the financial crisis, when each looked like the possible answer to “who’s next after Lehman?” (Lehman was the largest corporate failure in American history). Only time will tell if their claims are true. Unfortunately, it very much still looks like “the same old, same old.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in investment-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.