Deciphering the Citi Bailout
Wall Street was happy that the Federal Government hopped on board to help out Citigroup. The Dow was pushed upward a few hundred points but the end result for taxpayers is far less outstanding.
The deal was struck so that the US Government through the TARP program, the Treasury and eventually the Federal Reserve would back up the $306 Billion worth of mortgages and other assets that Citi holds. The TARP program gave Citigroup $20 Billion in exchange for $20 Billion in preferred stock, good deal there.
But as you go through the list there are many more transactions that take place. Citi will have to absorb the first $29 Billion in losses that it incurs on its $306 Billion portfolio. This should be easy considering that the company just received a $20 Billion “loan” in the form of 8% dividend preferred stock. Past the $29 Billion, the remaining losses will be covered 90% by the government and taxpayer in some form or fashion with the remaining 10% covered by Citigroup.
The Treasury will only back up $5 Billion in losses past $29 Billion. Thus the treasury only has exposure to $4.5 Billion in the deal. Next will be the FDIC which will accept the next $10 Billion in losses for a total output of $9 from the FDIC. Then steps in the Federal Reserve will take the remaining losses past what Citi, the treasury and the FDIC ultimately assume.
In return for the backing of the Treasury, FDIC and Federal Reserve the taxpayers get $7 Billion more worth of preferred stock. There is a problem here; the government has a total risk exposure of $249.3 Billion. If the $306 Billion portfolio went to worthless, the government and the FED would be out $249.3 Billion and get only $7 billion in obviously worthless preferred stock to pay for it.
Even a reasonable 20% drop in the value of Citi’s assets ($306 Billion to $244.8 Billion) the government would put up $28.98 Billion. All for just $7 billion worth of preferred shares.
It is apparent that Citi got the best deal out of all the bailouts thus far. Citi’s stock rallied big time on the news that the US Government would take the brunt of its losses. The government really through Wall Street a bone this time! No deal Howie!
As a condition for the bailout the top mamangement ought to be forced to resign.
I would have expected much more for the Taxpayers in this bailout too. The taxpayers are going to lose some serious cash on this deal.