Will Citi announce a government bailout by Monday morning?


Usually the Treasury likes to announce its financial rescue plans before the Asian markets open on Sunday night. But it looks like this weekend, investors will need to settle for sketchy outlines of a bailout plan for now. That's because Citigroup (NYSE: C) suffered a nasty tumble last week -- ending below $5 -- which as I posted is a dangerously low level since institutional investors need to dump the stock.

The plan -- whose details are likely to become much clearer by the time the sun rises on the East coast of the U.S. -- has something to do with Citi creating a so-called bad bank which would become the home of some -- possibly $50 billion worth -- of Citi's riskiest on and off-balance sheet financial instruments. (Its on balance sheet assets total $2 trillion and it has an additional $1.23 trillion off-balance sheet ones.) And the government would step in to cover the losses of the bad bank's assets above an initial amount that Citi would cover -- getting some kind of equity stake in Citi in exchange for covering those losses.

Many questions remain unanswered. Which assets will go into the bad bank? How much of the losses from the bad bank will Citi cover? Will Citi still have sufficient capital after it covers those losses? How much will the U.S. cover? Will the Treasury get dividend-paying preferred stock or warrants in exchange for taking on those losses? What will be the source of the capital that the U.S. injects into Citi if it gets preferred?

The question for investors is whether they should put in buy orders for Citi tonight on the strength of this vague outline. It seems to me that if the government takes preferred the answer is that common shareholders will be diluted so the answer would be no. If the government gets warrants instead, the deal might boost the common.

I know Citi is a $2 trillion bank operating in 100 countries but I still struggle with the idea that it's fair to stiff the auto industry but not Citi.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock

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Last updated: February 13, 2012: 07:31 AM

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