Up until last year, CitiGroup was the largest bank in the USA and in the top 3 globally.  Now Citigroup is breaking itself up as it desperately tries to avoid total collapse:

• Citi is selling its Smith Barney brokerage and investment business to Morgan Stanley so that it can raise $2.7 B in emergency cash.  Citigroup is selling 51% of Smith Barney now followed potentially by another $2.5 B to follow within 5 years if Morgan Stanley decides to expand its ownership of Smith Barney.
• Citi is also jettisoning 1/3 of its loan book by spinning off $600 B in bad “assets” into a seperate “bad bank” that can be further broken-up and sold off to the US government and other high-risk junkyard investors.

To put the size of this spin-off in a Canadian perspective, the resulting “bad bank” will have 50% more “assets” than the total assets of the Bank of Montreal and slightly more “assets” than the TD Bank.

The $1.2 T magnitude of the 2009 US economic bailout is approximately equal to the size of the entire Canadian GDP.  According to Statistics Canada, the Canadian economy is dependant on exports for 45% of this GDP and 76% of those exports are based on trade with the USA.  However, Canada’s trade surplus is currently plumeting with November 2008 exports running at 50% less than September’s export volume. 

The worst of the fallout has still to hit the Canadian economy and ultimately Canadian banks.  Given the rate of erosion of exports, this will likely occur within 90 days if the balance of trade dips negative.  

In the last 6 months, the largest (Citigroup) and thrid largest (Wachovia) banks in the USA have crumbled – anyone who thinks that the Canadian banking industry is immune to these issues is simply not in touch with reality.

In order to approve the bailout plan, Congress had to raise the debt ceiling for a second time this year to a whopping $11.3 trillion. If the United States actually does hit the $11.3 trillion mark, debt will then make up more than 70% of that nation’s gross domestic product (GDP).

Meanwhile the 2008 Q3 GDP results indicate that US GDP is shrinking by 1% annually (0.3% negative change from Q2 to Q3 x 4 = 1.2%).  The Canadian GDP is also shrinking at the same rate but federal government debt is only 48% of GDP. 

The situation underpinning the US GDP is not very good as these Q3 / Q2 comparisons indicate that Americans have significantly reduced investments in their own economy:

• Consumer spending -3%
• Residential investment -19%
• Fixed investment – 1%
• Business equipment -5%
• Inventory levels -38%

The high USD is also killing American exports to the tune of -350% per quarter! This is not good for the job situation in the US which in turn will fuel continued deterioration in consumer & residential spending.

Is this just due to a temporary blip in US banking credit?  No.  In fact the non-borrowed reserves underpinning the entire US banking industry is negative and the situation has been getting worse each month since 2007. 

In other words, the US banking industry is completely bankrupt and in aggregate is entirely propped up by borrowing from Federal Reserve (which in turn is financed by US government debt).

Is Canada in any better shape?  With 80% of our GDP tied to the USA, the Canadian economy is just a lifeboat still tied to the deck of the Titanic by a very long rope.  It is no coincidence that Canada is urgently exploring a free trade agreement with the EU.