Citigroup (NYSE: C) got a bailout from the government, but is the deal big enough to save Citi? This deal sounds like an interim solution rather than a permanent one. That's because after losing $20 billion in the last year, Citi has $2 trillion in on-balance sheet assets; another $1.23 trillion in off-balance sheet assets; and $36.8 trillion in derivatives. It is likely that the losses from these financial WMDs could exceed the amount Citi got from the government.
What does Citi get? Under the terms of the deal, Citi gets $20 billion in cash from the government (on top of the $25 billion it already received); Citi must cover the first $29 billion in losses of a $306 billion pool of assets -- the government picks up 90% of the remaining losses with Citi covering the other 10% from its mortgage-related assets; and Vikram Pandit gets to keep his job. The Treasury Department will use TARP to cover the first $5 billion of losses; the FDIC will take on the next $10 billion; and the Fed will assume any additional losses.
What does the U.S. receive? The U.S. gets $27 billion in preferred stock yielding an 8% interest rate. And that preferred stock comes with warrants to buy 254 million shares at $10.61 each. Citi must also pay no more than a penny a share dividend for three years -- down from 16 cents recently. The U.S. also negotiated executive compensation restrictions.
This deal could saddle the government with $277 billion worth of losses -- that's because Citi can "cover" its 10% share with toxic waste -- in effect adding to the government's losses. Furthermore, the 8% dividend will require Citi to come up with $2.2 billion in cash per year -- which it could have trouble finding. Finally, given the amount of dilution of the common shares in this deal, the warrants could prove worthless.
So three questions remain:
- What crime did the American taxpayer commit that justifies what is in effect a $322 billion civil penalty to cover Citi's mismanagement?
- How much more will taxpayers need to shell out before Citi can function on its own?
- Why is it so easy for Citi to get hundreds of billions of taxpayer money while the auto industry gets stiffed?
Despite these unanswered questions, the short term impact of the deal on Citi stock is positive -- in pre-market, Citi traded up 60% -- making it look like buying Citi last night (as I had suggested) might have been a good move. The question is whether this rise represents short covering or a real long-term improvement in Citi's value.
Unfortunately, I would vote for short covering.
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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Reader Comments (Page 1 of 1)
11-24-2008 @ 9:40AM
beachpaul said...
In the early nineties there was a savings and loan crisis in the state where I grew up. The state had to bail out the industry, guarantee all the deposits. It took months for some people to finally get their money back. Loans were settled for twenty, forty, fifty cents on the dollar. If you weren't involved, you as a taxpayer, became involved. You felt like a chump for not owing and pocketing 50, 60, cents on the dollar like so many inside players did. I'm getting that feeling again.
11-24-2008 @ 10:53AM
BHarrison said...
This is merely an exponential magnification of the Silverado Savings and Loan Scandel from years ago . . . . Are the Americna people going to allow this continued ripping off of their investments and their standard of living being decimated?
The people deserve the government that they allow to continue to exist.