Monday, November 24, 2008

“Well-Capitalized” Citigroup Gets Taxpayer Bailout

The New York Times reports U.S. Approves Plan to Help Citigroup Cope With Losses

Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.

In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.

Citigroup will effectively halt dividend payments for the next three years and will also agree to certain executive compensation restrictions, which will be reviewed by regulators. It will also put in place the F.D.I.C.’s loan modification plan, which is similar to one it recently announced.

Some Informed Reactions….

Todd Harrison:

Welcome back to the world’s wildest reality show brought to you by the U.S. government and your very own taxpayer dollars.

Jonathan Weil:

So, in truth, Citigroup had little, if any, real capital, even if the values for all its toxic loans and mortgage-related investments had been accurate. Most of the above-listed items won’t help the bank absorb losses. Rather, they are the kinds of things that cry out for more capital.

What we need from America’s banks is for their leaders and regulators to start speaking with credibility.

We’ve had enough funny numbers.

Paul Krugman:

A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.

James Kwak:

The government (should have) had two goals for this bailout. First, since everyone assumes Citi is too big to fail, the bailout had to be big enough that it would settle the matter once and for all. Second, it had to define a standard set of terms that other banks could rely on and, more importantly, the market could rely on being there for other banks. This plan fails on both counts.

Robert Reich:

This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.

Yves Smith:

Note key element of the deal is that the Federal government will guarantee $300 billion of Citi assets, a much bigger number than had been leaked earlier, with a rather convoluted loss-sharing arrangement, but the bottom line is that Citi is at risk for at most $40 billion. Citi also gets a $20 billion equity injection, on slightly more onerous terms than the initial TARP investments, but still more favorable than Warren Buffett's investment in Goldman. Oh, and it appears there will be NO management changes.
I do not see how GM can be denied a rescue now (not that that outcome is really in doubt, merely how much pain will be inflicted on management and the UAW).

Mike Shedlock:

Taxpayers are conceivably on the hook for 90% of ($306 billion - $29 billion), in other words about $249 billion. But where does this money come from? Congress did not appropriate $249 billion for this.
This bailout represents a huge taxpayer risk. Yet it's important to note that not all of the collateral will go bad. The percentage that might go bad depends on the valuation and selection of assets.
Transparency is an issue in light of Bloomberg's freedom of information lawsuit against the Fed for refusal to disclose how it has used the $350 billion in TARP funds allocated by Congress. Thus, inquiring minds are questioning how the valuation and selection of assets will occur, but so far there are no answers.


I am not in favor of this bailout of course, but it is a far better scheme on the surface than blowing another $350 billion. The pertinent question is just how bad those $300 billion in assets will be. I doubt the Fed will disclose the assets it is guaranteeing.

The Economist:

With markets for mortgage-related securities feeling renewed stress, the authorities have apparently now accepted the need to deal with the tinder of illiquid securities on banks’ books. America’s Treasury will face pressure to offer similar schemes to other banks, not least because singling out Citi for special treatment puts them at a competitive disadvantage. But it may yet have to go further still. The rescue does not take the assets off Citigroup’s balance-sheet in the same way that the Swiss transferred $60 billion in hard-to-sell securities from UBS to a fund owned by the central bank. A system-wide bad bank could well be the next stage in the effort to douse the flames.