Okay; I can honestly say that I didn’t see this happening. I figured that Citigroup, like Bank of America and JP Morgan Chase, would both be strong enough to weather almost anything the economy could throw at them, but their recent stock movements are highly precipitous.

Citi Weighs Its Options, Including Firm’s Sale - WSJ.com

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, according to people familiar with the matter.

The internal discussions are at a preliminary stage and don’t signal that Citigroup’s board and management are backing down from their insistence that the New York company has ample capital, funding and strategic direction, these people said. But with the stock down another 26% Thursday, its worst one-day percentage decline ever, Citigroup officials have decided they need to reckon with a range of scenarios that were unthinkable only weeks ago.

Citigroup’s board of directors is scheduled to have a formal meeting Friday to discuss the options, according to a people familiar with the situation. Meantime, directors have been talking by phone about what could be done to reverse the stock’s slide.

Top executives were locked in meetings Thursday to hash out a stabilization strategy. A Citigroup spokeswoman said in a statement Wednesday evening: “Citi has a very strong capital and liquidity position” and is “focused on executing our strategy,” which includes cutting expenses and selling assets. “We believe the benefits will be seen over time.”

With roots stretching back to 1812 and more than 200 million customer accounts in 106 countries, Citigroup is an icon of global capitalism. It is getting battered by the same financial storm that has already remade the face of Wall Street, forcing the sale of Bear Stearns Cos. and Merrill Lynch & Co. earlier this year, and triggering the bankruptcy filing of Lehman Brothers Holdings Inc.

Chief Executive Vikram Pandit and other Citigroup executives have told colleagues they are frustrated and befuddled by this week’s 50% stock decline. Investors have dumped bank stocks en masse on fears that economic woes will batter financial companies worse than previously expected.

It’s going to be interesting to see how this plays out. Wonder if the A-Train has been shorting “C”?

Perhaps this plan will make Art a little happier … but I’d like to read the actual text of the bill before I make any judgments.

Democrats offer alternative ‘no bailouts act’ - CNN.com

WASHINGTON (CNN) — A small group of Democratic House members put together an alternative to the $700 billion financial bailout measure that was defeated in the House on Monday.

Rep. Peter DeFazio, D-Oregon, said they tentatively are calling their options the “no bailouts act,” which would eliminate or reduce the risks to taxpayers in bailing out financial institutions holding bad mortgage assets.

The group introduced its bill after the House on Monday rejected a $700 billion bill that would have authorized Treasury Secretary Henry Paulson to buy bad mortgage-related securities and other assets that have been clogging credit markets worldwide.

DeFazio said he voted against Monday’s bill because taxpayer protection measures were “nonexistent.”

“I have very little confidence in Mr. Paulson,” DeFazio said at a news conference with several other House members, who want Wall Street, not taxpayers, to bear the burden of the bailout.

DeFazio said the crisis can be resolved with market discipline and regulatory functions, which would open up lending opportunities for banks and other institutions.

I did find this story on NPR’s “Marketplace” to be quite interesting as well:

John Dimsdale:The Federal Reserve, Treasury and the FDIC have broad powers to lend money, insure assets and inject cash into the banking system as they’ve already done for the likes of Bear Stearns, AIG and Wachovia … still, in theory, the Fed even has authority to do just what the congressional bailout authorizes — take bad debts off the hands of struggling banks.

• Nigel Gault: I think there is a limit to which the Fed can do that because you’re almost trying through the back door what Congress just said yesterday the government can’t do.

Global Insight economist Nigel Gault.

• Gault: The Fed could offer loans against riskier collateral, of course that is bigger and bigger risks for the taxpayer, because ultimately if the Fed makes losses, then the taxpayer would be liable.

The Fed’s other tool is to cut short-term interest rates. But they’re already so low, there’s not much power left in that tool. And using it creates a risk of inflation, says former Treasury economist Bruce Bartlett.

• Bruce Bartlett: The taxpayer is going to have to pay one way or the other, and voting down this legislation didn’t do anything to protect the taxpayer. It just means he’s going to have to pay in some other way that may be more costly than the $700 billion.

As of the middle of last week, the Fed had issued emergency loans to investment banks and insurance companies worth more than $400 billion.

From this morning’s Wall Street Journal:

‘No’ Votes Came From All Directions

The fatal “no” votes to the financial rescue package came from a strange-bedfellows coalition of lawmakers, from the most conservative to the most liberal members of the House, with a large number of representatives from low-income districts angry that Wall Street seems to be getting handouts while people getting tossed out of homes would get minimal aid.

One common strand that tied some of the diverse opponents together: a tough re-election fight. Eighteen of the 21 most vulnerable Republicans up for re-election, and 10 of the 15 Democrats in the closest races voted against the $700 billion financial rescue, illustrating the political hazards of bailing out Wall Street without offering an equally generous hand to taxpayers.

To me, this illustrates that the members of the House aren’t really thinking about doing what’s best for the country, even if it’s unpopular, but just care about protecting their jobs. It does make me wonder how many of those “no” votes would have been “yes” votes if we weren’t only 5 weeks from Election Day?

As Juvenal said in Roman times, “Two things only the people anxiously desire — bread and circuses.”

If everything was left solely to the people, do you think we’d be paying any taxes? But without tax revenue, how would vital government programs, such as say … Defense … be funded? Taxes are not popular, but are vitally important to ensure that our government can continue to function.

Putting together a plan, even an initially flawed plan that can be revised down the road, is vital to getting our economy back on track. The current ad hoc approach causes more uncertainty, more panic, more consolidation, less competition, and certainly doesn’t seem to be working.

What is going to happen if the Citigroup, Bank of America, and JP Morgan Chase acquisitions of WaMu, Wachovia, Bear Stearns and Merrill Lynch lead to their own financial troubles?

Without a Bailout Plan, What Will the Cost Be? - TIME

By voting down the proposed $700 billion financial bailout package — and causing a spectacular stock market rout — a majority of members in the House of Representatives made a clear statement that they didn’t want to put taxpayers on the hook for the failures of financial institutions.

But there’s a catch: taxpayers are already on the hook for the failures of financial institutions, and it’s possible that the bill will actually be larger without bailout legislation than with it. That’s because the regulators who mind the financial industry — the Federal Reserve, Treasury and FDIC — will keep doing what they’ve been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn’t require members of Congress to explicitly approve their actions.

The fact is that as much as many of us would like to think so, there’s truly no such thing as a free-market economy; especially not as global as the economy has become over the past 20 years.

On Monday afternoon, Wall Street basically stopped trading to watch TV — mainly CNBC — to see how the House of Representatives would vote on the $700 billion bailout package. When it first started looking like the bill would fail, the Dow plummeted 389 points, or 3.6%, in just seven minutes. If it had continued at that pace for much longer, this would have been perhaps the most harrowing day in stock market history. It didn’t, but things were still really, really bad. The Dow ended the day down 778 points, or 7%, and the S&P 500 — a better measure of the overall market — was down 107 points, or 8.8%, its worst performance since the 1987 market crash. And markets for bonds and short-term loans were, for the most part, nonexistent.

And without a market for commercial paper, there is no short-term financing available for most businesses to conduct their day-to-day business … like rent and payroll. According to a recent Bloomberg article, “a continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services.”

So what happens now? On Capitol Hill, House leaders said they’ll try again soon. Treasury Secretary Henry Paulson practically begged for a revised deal in his brief appearance after the market carnage. “Our tool kit is substantial but insufficient,” he said. The market’s traumatized reaction today may change some minds and some votes.

In asking Congress 11 days ago for the authority to spend up to $700 billion to buy troubled assets, Paulson and Fed Chairman Ben Bernanke were hoping to share some of the responsibility and the blame — and get the freedom to boost companies that weren’t already on the brink of failure. Instead, they’re back to being crisis managers for the moment — and maybe for the duration of the crisis.

That’s not all bad, especially now that most of the endangered financial institutions are commercial banks. The Federal Government has clearly defined that authorities take them over, merge them out of existence or shut them down — whereas it had to make things up as it went along with investment banks Bear Stearns and Lehman Brothers and insurer AIG. That’s why the demise of giant banks Washington Mutual and Wachovia, arranged over the past week by the FDIC, occurred in a far more orderly fashion than the non-bank meltdowns.

But orderly isn’t the same as cheap. To get Citigroup to absorb Wachovia, the FDIC agreed to share the risk on a $312 billion portfolio of loans (Citi has to eat the first $42 billion in potential losses; anything above that hits the FDIC fund).

According to a Bloomberg story last week: “It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year.” And that was BEFORE the FDIC became exposed to another $280 billion … so now the FDIC may be in need of its own $430 billion “bailout”.

Also, the fact that every big FDIC deal so far in this crisis has been different — IndyMac was allowed to fail, with only insured deposits safe; WaMu was seized, but all depositors were protected; and Wachovia was sold in a deal that protected both depositors and owners of the company’s bonds but left shareholders with very little — has left investors guessing about the fate of the rest of the banking world. Hardest hit in today’s market sell-off were regional banks like Sovereign Bancorp and National City, perhaps because they seem too small to get special FDIC treatment.

Federal authorities are going to keep doing whatever they can to keep the financial system from collapsing. Taxpayers will bear the risks and the costs of that, whether Congress votes to put them there or not. And it’s possible — although nobody can know for sure — that this ad hoc approach will end up costing more than an up-front $700 billion bailout.

So … is it better to have a imperfect plan, but a plan nonetheless? Or is it better to simply keep floating along as if the market will take care of itself, and have the government step-in again, and again, and again, with no real rhyme or reason as to which companies they help and which they don’t?

This is an interesting twist. Obviously, it means that Morgan Stanley will be subject to more stringent regulation, but I wonder what it fundamentally means for the business model. This will be really interesting to following over the next days/weeks/months.

Goldman Sachs, Morgan Stanley To Be Bank Holding Companies - WSJ.com

The Federal Reserve said it had approved the transformation of both Morgan Stanley and Goldman Sachs from investment banks to traditional bank holding companies, a step that would place the last two Wall Street titans under the close supervision of national bank regulators, subjecting them to new capital requirements and additional oversight.

The Fed said it would also extend additional lending to the broker-dealers of the two firms, in addition to Merrill Lynch’s, as they make the transition.

The steps effectively mark the end of Wall Street as it has been known for decades, and formalizes a quid-pro-quo that regulators have warned about in the months after Bear Stearns’s near collapse — in return for access to the Fed’s emergency lending facilities, the firms would need to subject themselves to more oversight. The step could have far reaching effects on their profitability and their business models.

More, from CNN:

Fed changes status for Goldman and Morgan - Sep. 21, 2008

WASHINGTON (AP) — The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks - Goldman Sachs and Morgan Stanley - to change their status to bank holding companies.

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

The change continued the biggest restructuring on Wall Street since the Great Depression.

And the Fed Statement:

Fed Statement on Goldman, Morgan Stanley

The following is the Federal Reserve’s statement on the change in status of Goldman Sachs and Morgan Stanley:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash - WSJ.com

Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance

NEW YORK — The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. said it would file for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn’t in the best interest of shareholders.

Early Monday morning, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.

On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion.

And:

Bank of America to Buy Merrill - WSJ.com

The futures of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as Wall Street wakes up to a world where the independent broker-dealers are increasingly few in number. They would be the last of the big five independent firms, with Merrill and Bear Stearns Cos. having been sold and Lehman likely to close down.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

Knowing how anxiety affects me physically, I wonder what my day is going to be like today.

Yeah, sure, I work for Morgan Stanley, one of the survivors (according to the article in the previous post). It’s still going to be a painfully stressful time for anyone working for an investment bank for awhile.

I wonder how the hedgies are doing …

Goldman, Morgan Grasp at Bitter Prize
September 15, 2008; Page C1

Goldman Sachs Group and Morgan Stanley look like survivors in Wall Street’s purging of stand-alone investment banks. But the prize will be bitter.

The investment banks report results this week for their fiscal third quarter, which ended in August. Analysts expect a profit from both but have slashed estimates in recent months amid the firestorm in financial markets.

Goldman and Morgan aren’t only in better shape than other bulge-bracket investment banks — but they also may soon be the only ones left. The credit crisis has eliminated Bear Stearns and is pushing Lehman Brothers toward liquidation. (Lehman, which prereported last week, is scheduled to formally report third-quarter earnings on Thursday.) Merrill Lynch, due to report results next month, struck a deal to sell itself to Bank of America. It is trailing its peers, thanks to its still-sizable exposure to the mortgage market.

Up late getting caught up on the weekend news. Really, really, really not looking forward to the state of the financial markets on Monday.