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Citigroup Rescue: Raw Deal for Taxpayers, But It Had to Be Done
Posted Nov 24, 2008 10:38am EST by Aaron Task in Investing, Recession, BankingExpectations for a government rescue of Citigroup were fulfilled in the wee hours Sunday night/Monday morning. In exchange for $27 billion in Citi preferred stock, the government will inject $20 billion of capital in the struggling firm and guarantee $306 billion in troubled mortgage assets.
The devil is in the details (see below), but Mark Dow, hedge fund manager at Pharo Management, said the government had to act.
"You can Monday morning quarterback and say, 'They could have done it better,' but they had to do something, and they did." says Dow, a former staff economist at Treasury and the IMF. "I wouldn't be buying Citi shares, but the Fed and Treasury are committed to protecting the integrity of the financial structure, and that has to be applauded."
Financial markets did "applaud" early Monday as Citi shares jumped more than 50% and major stock indexes rallied by more than 2.5% in the first hour of trading.
But about those details: The deal is complex in its structure, but when all is said and done the government is on the hook for about $249 billion in toxic mortgage-backed assets in exchange for $27 billion in Citi preferred stock.
The preferred shares pay 8% but, all in all, it's another raw deal for the taxpayer, which may explain why the deal's structure is so complex (they're hoping no one will notice).
ClusterStock's John Carney lays out terms of the $306 billion in loans:
- The first $29 billion of losses from the portfolio will be absorbed by Citi entirely.
- The Treasury Department will take 90% of the next $5 billion of losses, with Citi taking the rest.
- The FDIC will step in and take 90% of the next $10 billion of losses while Citi absorbs the balance.
- Losses beyond that will be taken by the Federal Reserve in the 90% government role. "Note that Citi is still supposed to take the remaining 10% at this stage but it's hard to believe that anyone really thinks Citi would be able to take any more losses once it had written down $40 billion more in this portfolio," Carney writes.
Dow says the point of this exercise is to bring about an orderly unwinding of Citi's leverage, as opposed to Japan, where bad debts were allowed to roll over into perpetuity, or Sweden, where banks were forced to take massive write-downs of bad debts before the government injected capital.
The problem with using the "Swedish Solution" for America's banks today is they might be insolvent if forced to take all the write-downs at once, Dow says.
To that point, Citi has an additional $2 trillions of assets on its balance sheet and another $1.23 trillion that are off balance sheet, the WSJ reports.
Assuming some large chunk of those "assets" ultimately prove to be liabilities, it's pretty likely this won't be the last "rescue effort" for Citigroup — or other big banks.
"Who knows what's inside these black boxes," says Dow, whose firm manages over $2 billion in assets and is in positive territory this year (he wouldn't specify). "The leverage frankly scares me. We have a lot more deleveraging in front of us in the coming years."
249 Comments
- Monday November 24, 2008 10:51AM EST
Put Pandit head on the plate......Fire.........Getting my taxes.........
Yahoo! Finance User - Monday November 24, 2008 10:52AM EST
after buying out others now citi. needs another bailout. wait intill credit cards fail wow.
- Monday November 24, 2008 10:52AM EST
LOL to above comment at 10:46AM, as i said to the Guys a few weeks back, people underestimate leverage, the assets are worth nothing as in "not Present" some don't exist, worthless. Understand?
- Monday November 24, 2008 10:53AM EST
If this had to be done,why didn't Lehmann have to be done?
Yahoo! Finance User - Monday November 24, 2008 10:54AM EST
gov. back to buying bad home dept.
- Monday November 24, 2008 10:54AM EST
Yes, me too. I really like eating beans and ramen 3 times a day, while the big shots fly to meetings in their private jets asking for government (read taxpayer) bailouts.
- Monday November 24, 2008 10:58AM EST
I guess the federal government has unlimited money, until they don't.
- Monday November 24, 2008 10:59AM EST
given the wsj article about competing banks short selling morgan stanley hence their crisis, one wonders what happened here. yes, citi caused their own problems but 3 bucks a share? come on!
- Monday November 24, 2008 11:02AM EST
$249 billion of losses in exchange for $27 billion Citi preferreds? Even my three-year-old can strike a better deal for himself than that.
- Monday November 24, 2008 11:03AM EST
I want the same deal for myself and every other taxpayer that Citi got. I'd like to do my investments and, if I have losses, the government would guarantee to pay about 90% of my losses and if I have gains, I get all of the gains. Another raw deal for the taxpayer. Socialist policies are at work and will lead to the downfall of this country and the world.
- Monday November 24, 2008 11:04AM EST
Why? what's the downside of no action. This is political correctness. Wha Wha... we can't let C fail.... Yes they can fail as they have failed.
- Monday November 24, 2008 11:05AM EST
We been rob again.......I thought no more hurts.............But again the unexpected happen, he give my taxes to the sucker.......... Good People out hurts is noy yet over.......Please put your hurt feelings all nice people..........
- Monday November 24, 2008 11:05AM EST
I've actually lost count, but I'm guessing we now have the US Gov't (and all of taxpayers) holding about 1.5 trillion $ in IOU's from poorly run insurance, banking, brokerage, mortgage and soon auto firms. I'm afraid I fail to see where all of this new found money is emerging from. Does the US have some monstrous savings account they are tapping into that I am unaware of? If not, we're simply delaying the inevitable. Let these poorly managed companies fail or be absorbed by other healthier institutions and quit giving them my money.
- Monday November 24, 2008 11:07AM EST
I'm just wondering how much the government, or Citigroup, is going to help the individual Visa or Mastercard holder who got into trouble and owes money to Citigroup and gets increases in the interest on their cards. The banks wanted to loan the money, get the individual into trouble and then charge higher rates for that money. It was the banker who allowed the individual to borrow and now the banker wants the government to loan/give them money to rescue their bank. I can understand helping the bank in the same way the bank helps the individual, charge the bank much higher interest. Then use those interest payments to help the individual pay the costs the bank charges the individual.
Yahoo! Finance User - Monday November 24, 2008 11:08AM EST
People on fixed income financed the housing bubble with low interest rates; now we're financing the bailout with low interest rates. Good old American know not; if it doesn"t work, do it again.
- Monday November 24, 2008 11:08AM EST
They let Lehmann go under to get an idea on where all these derivatives hiding in the worlds financial companies and banks. Lehmann held the least $6.1 Trillion, City and the other banks were kicked up to larger banks to takeover. Derivatives are sold over the counter 98% of the worlds $585 Trillion are un-regulated. No ones who betting with who. Problem is there are no more banks left to takeover this debts. Finacial Amargeddon in well on its way. It has alot to do with the NWO. Out of chaos they created order. The Elite has planned this now for a very long time. BilderBerg Group
- Monday November 24, 2008 11:10AM EST
hey why worry as long as the fed has Printing Presses they will continue to print greenbacks until we need a wheelbarrow to buy bread LOL
- Monday November 24, 2008 11:10AM EST
Thank you. I just made 2.1 million today!! I invested in Citibank Stock last week because I knew they were to big to fail. As I predicted the Good Ole Govermnet step in to help Citibank and...MY STOCKS!!! The stock is currently up 60 percent today!! GOSH..."I LOVE THE SMELL OF PROFITS IN THE MORNING" OH.....I forgot to tax the poor tax payer for making me another million today! Thanks... and keep up the good work. The next bailout will be GM and I will make another 2 million on that stock!! Just watch.
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Yahoo! Finance User - Monday November 24, 2008 10:46AM EST
Don't know about you, but I'm feeling pretty good right about now.It's nice to start my week helping out a hugh bank.It makes feel like I'm doing my fair share for humankind. I'm sure i can trim a little here alittle more there