When a Bank Becomes Too Big to Effectively Function

When the economic downturn began at the end of 2008, there were certain banks that were deemed “too big to fail.” The federal government gave them that status, and then proceeded to bail them out with money printed from the Federal Reserve. That’s also when the quantitative easing program began and the employment rate began its plummet to historic lows. 
Some of the banks that received bailouts included JP Morgan Chase and Bank of America. Shortly after getting bailed out, they bought out many neighborhood banks across the nation. Now, as Citigroup fails another stress test administered by the Fed, JP Morgan Chase and Bank of America are licking their chops in anticipation of eating up its assets as soon as that option becomes available.

Citigroup has likely been a formidable competitor. It is one of the largest banks in the world, with a presence in 100 nations. So if Federal Reserve Chairwoman Janet Yellen and other Fed decision makers decide that Citigroup’s present situation puts the global economy and job market at too much of a risk; they will have to go slowly into that proverbial dark night.

Citigroup claims that the failed stress test is a bogus outcome and that it has plenty of capital to survive an economic earthquake, but the Fed still failed them on “qualitative” grounds. There are likely multiple facets that have brought on Citigroup’s problem. Banking analyst Fred Cannon of Keefe, Bruyette & Woods notes that, “It is a huge challenge at a company that is as big and everywhere as Citigroup.”

Citigroup grew to its enormous size by doing what bailout recipients such as JP Morgan Chase and Bank of America are doing today: merging with and buying up other banks that are in financial trouble. In all of its acquiring, some believe that it may very well have become too big to effectively function.

Another facet to Citigroup that is being looked at very closely by the Feds is a service it offers to transfer large amounts of money between nations. It’s suspected that Citigroup became too large to effectively monitor money laundering issues.

Citigroup is already in the process of trying to restructure, beginning with cutting costs and dropping unwanted businesses. One of the ways that companies cut costs is by cutting jobs.

Citigroup has been cutting jobs since 2008, but its biggest chunk so far was announced a couple years ago when it was reported that they would cut 11,000 jobs. Now that they have failed another stress test, it likely won’t be long before another round of cuts gets reported.

The unwanted businesses it is dropping will also mean lost jobs. Citigroup is being forced to streamline the range of what it can offer to customers, so any businesses with whom it was doing business will be losing a very large client, which means those businesses can no longer afford to keep as much staff employed. 
The Wall Street Bailout bill that was signed into law back in 2010, was supposed to mean that American tax payers would not be bailing out any more banks. It remains to be seen if Citigroup will be deemed too big to fail or not, and how Washington will get around that particular law if it’s decided that Citigroup should be bailed out.

Perhaps the bigger picture, though, is the impact that an alleged Citigroup failure could have on the global economy. The number of jobs and businesses that will be affected is nearly unfathomable. And certainly the earthquake in the stock market would be a massive one.

Because Citigroup is in so many nations, job losses would happen not only in the US, but also in other nations. Some of the areas that could be impacted in other nations include call centers, tellers, managerial positions, sales forces, even investment advisors and stock traders. The employees of those companies that use the various products and services of Citigroup would also be impacted.

The lack of transparency in connection to the stress tests is being blamed for much of the volatility and uncertainty that has been plaguing the stock market, as well as damaging investor confidence. It’s enough to make one ponder if the severe recession or even market meltdown that the stress tests are supposed to prevent, could be the very thing that causes it to occur.