Citigroup: Still A Member Of The 'Too Big To Fail' Club, Says Moody's

06/12/2010 05:12 am ET | Updated May 25, 2011

Citigroup still maintains full membership in the 'Too Big To Fail' club, according to a report released today by Moody's. (Hat tip to WSJ's Real Time Economics)

Though the U.S. plans to sell its remaining shares in Citgroup by the end of the year -- all 7.7 billion of them Moody's notes -- that doesn't mean the government has removed its implicit backstop of the megabank. For now, the bank is still too large and interconnected to let it fail, Moody's suggested. The credit rating firm declined to adjust Citi's credit rating today, saying that it sees "no rating implications from the disposition of the government's 27% stake in the company."

Permanent government ownership of shares can be an important factor to consider when evaluating the probability of government support for a bank. However, in our analysis we never assumed that the U.S. government's stake in Citigroup was permanent. Instead, as noted above, our support assumptions are very high because of Citigroup's interconnectedness in the global financial system and its systemic importance.

It's also worth pointing out that Moody's sees the possibility of a financial reform as the biggest threat to Citi's credit rating.

The greatest threat we see 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.

But long-term, the bank's membership in the TBTF club, may have helped the bank retain key clients. More from Moody's:

We see the U.S. government sale of its stake in Citigroup Inc. as positive for its institutional businesses since institutional clients are prone to see government ownership as a stigma. Therefore, the government's sale of its stake in Citigroup could help the bank retain its institutional clients.

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