"MY GOD, THE BOAT IS LEAVING US!"

The 65 souls aboard lifeboat#8 were desperate. They had taken to the boat as the passenger ship Vestris sank, two days out of Hoboken on November 12th, 1928. Their leaky craft had filled with water as the night wore on, and was on the verge of breaking apart in the rough water. Spotting lifeboat#1 not far away, they maneuvered close enough to yell over for help. Some began to swim.

However, seeing all those desperate people, the survivors on lifeboat#1 kept their distance. Those who approached by swimming were pushed away with oars.

As lifeboat#1 pulled away, passenger Clytie Raphael was heard to exclaim “MY GOD, THE BOAT IS LEAVING US!”. Mrs. Raphael, and most of those on lifeboat#8, were lost at sea.

It has become clear over recent months that the Federal Government has been at the helm of its own lifeboat, into which it is hoisting certain banks and financial institutions to safety, while leaving others to their fate.

Over the past seven months, the US Government has stepped in to rescue Fannie Mae (FNM), Freddie Mac (FRE), and AIG (AIG).

It also, very conspicuously, allowed Lehman Brothers (R.I.P.) and Washington Mutual (R.I.P.) to fail.

In Congressional testimony today, Dick Fuld (Lehman’s CEO) was asked why he thought that Lehman was allowed to fail while others were saved. “I will wonder about that until the day they put me in the ground”, was his answer, “I do not know why we were the only one.”

Indeed.

Not a few others are wondering just what, exactly, the standard for rescue is.

For financial institutions, it is a matter of survival.

For investors, it is a matter of allocating capital and risk.

For everyone involved, the stakes are high.

So, who are the “Lifeboat Banks” ?

Clearly the list includes JP Morgan Chase (JPM), to whom the Feds handed the remains of Bear Stearns (R.I.P.) and Washington Mutual, as well as Goldman Sachs (GS) and Morgan Stanley (MS), who climbed aboard with their government-encouraged reclassifications as ‘Bank Holding companies’.

Bank of America (BAC), given its size, and relative balance-sheet strength (at least to others), secured its status through its acquisition of Merrill Lynch (MER).

And, until last Friday, Citigroup (C) was assumed to be OK as well.

Simply by virtue its sheer size and global footprint, Citigroup was assumed to be 'safe'. Further proof came with its announcement last Monday that it would, with the assistance and intervention of the FDIC, acquire Wachovia’s (WB) operations and balance sheet. Investors cheered as Citibank shares rose 20% from $19.54 to $23.50 by early Thursday.



With the news Friday morning that Wells Fargo (WFC) had snatched Wachovia away for itself, Citigroup shares plummeted. The shares finished today at $ 17.41, off 26% in two days, and off 11% from last week’s open.

Was the Wachovia acquisition so essential to Citigroup's prospects that the business itself is significantly impaired without it? No. There are plenty of regional bank candidates which can provide the type of footprint that Citibank is looking for.

Investors had taken the government-assisted deal on Monday as a sign of Citibank’s membership in the lifeboat club. They ran for cover when Wells Fargo’s deft action Friday called that status into question.

Citigroup and its shareholders were left to exclaim, as did Mrs. Raphael - “MY GOD, THE BOAT IS LEAVING US!”

Whatever happens with the Citigroup – Wachovia – Wells Fargo mess (the government is trying to mediate), we are clearly now in a world where the decisions and actions of bureaucrats and regulators mean more to the market than business fundamentals.

Citigroup, and others intent on survival, do have one advantage going forward that Mrs. Raphael and her fellow passengers didn’t…

They can hire lobbyists.


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