Wall Street is divided on whether the government's move to shore up Citigroup Inc. will prompt other ailing big banks to ask regulators for more funds, but analysts and others said its rivals are likely glad the government acted Sunday night to aid Citi.
"I think it should be viewed as a positive for the industry," said Frank Barkocy, the director of research at Mendon Capital Advisors.
Bart Narter, an analyst at the Celent unit of Marsh & McLennan Cos., said: "If Citi were allowed to fail, the impact on the rest of the financial services industry would be too far-reaching and the damage to the economy too great. It had to be done."
However, Jim Gardner, co-founder and head of investment banking at Commerce Street Capital, said the government's treatment of Citi could encourage other companies to come knocking for more handouts.
"I just don't see how they could do this for Citi and not have it be an option for the next big bank that might need it," he said. "The feds seem to be taking on more and more of a role" in helping the banking sector rebound, and "I don't think that's going to change soon."
But Robert Albertson, the chief strategist at Sandler O'Neill & Partners LP, said he believes other companies are unlikely to envy Citi's position, and so would do their utmost to avoid finding themselves in a similar situation.
"I don't think the terms would induce additional participation. The condition of other companies would. If so, they'd be cornered into it," he said.
Mr. Barkocy said the government's deal with Citi calls in to question recent changes to the Treasury Department's capital program. The $700 billion initiative was originally supposed to buy soured assets from banks, much as the government's deal with Citi would do, but was changed in recent weeks.
Representatives of Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co. would not comment.
However, a source close to JPMorgan Chase said company executives were "generally pleased" with the outcome. There was a realization that Citi "had to stay in business" and that the governmental intervention made the company a healthier counterparty for others, the source said. "It doesn't give Citi a competitive advantage, because they are paying for" the capital, the source said. "It makes Citi a healthier counterparty, which is better for us."
And though Citi's deal is not without terms— in exchange for $20 billion in new capital and a backstop for more than $300 billion in possible losses it must cap its quarterly dividend at a penny for three years and subject itself to more regulatory scrutiny over executive compensation — some observers said they are not particularly strict terms.
"What surprises me was that there weren't any management changes announced with this," said Jacqueline Reeves, the managing director at Bell Rock Capital LLC. The combination of 20% risk weighting for Citi's assets, along with existing accounting rules, should have other financial companies concerned, she said.
Mr. Albertson said the impact on asset valuations remains to be seen, because the Citi arrangement isolates assets. "There is the potential for loss sharing," he said. "But it's not clear to me that this round of funding for Citigroup is going to precipitate writeoff amounts in the future."
