After a long weekend of negotiating, the government agreed Sunday to a bailout of Citigroup. The deal calls for a cash injection of $20 billion. The deal also calls for a backstop of more than $300 billion in troubled Citigroup assets. Under the arrangement, Citigroup would be on the hook for the first $29 billion in losses stemming from those assets. After that, the Federal Deposit Insurance Corp., the Treasury Department, and the Federal Reserve would shoulder any remaining losses.
From the U.S government press release: The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.
A copy of the term sheet can be found here (link).
The joint press release from the U.S. government can be found here (link).
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Monday, November 24, 2008
U.S. Agrees to Rescue Struggling Citigroup
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Should be an interesting day for their stock tomorrow. They had over 1 Billion stock traded on Friday. I wouldn't be surprised if it hit 1.5B by end of trading day, Monday.
ReplyDeleteWill be an interesting day indeed, Hk. I have the week off, so I will be able to watch closely. Should be fun.
ReplyDeleteWhat happens to the shareholders?
ReplyDeleteAnon, don't know yet. The company isn't being liquidated. And the government is being issued preferred stock with an 8% dividend as part of the deal. We'll see what the market thinks of the deal in the morning.
ReplyDeleteAnon, if they are taxpayers, they are getting screwed.
ReplyDeleteSorry to sound like a broken record, CM, but I am so fricking irked here!
"The U.S. government is committed to supporting financial market stability"
I guess we will see just how accurate that statement is tomorrow, wont we?
Who will decide what an "unusually large loss" is, I wonder?
BTW, I love that the bailout is called TARP...as in we'll just cover up the problems with some cash like a tarp....
::pissed off::
BTW that stock will be worthless by the time all is said and done.
ReplyDeleteLion, vent away, sweetie. That's why I have a comments section. You can be pissed here all day long. No worries.
ReplyDeleteMr. Market will tell us exactly what it thinks of the deal tomorrow morning.
Lion, if you read the press release, which I included with my story, you'll see that "unusually large" is something over $29 billion. Citigroup is on the hook for the first $29 billion in losses. Beyond that, the government backstop kicks in.
ReplyDeleteAlright, I saw that but...really...I just don't trust them.
ReplyDeleteWhen we cannot properly fund our schools, our roads or our police and firemen we should not be blowing this money like this.
ReplyDeleteWhen there are millions of children of hard working men and women who are still without healthcare, without a properly heated home, without a winter coat...we should not be blowing this money.
When, in what is supposed to be the greatest country on earth, there are millions of homeless people who will go hungry and freeze tonight we should not be giving this money to companies who will spend it on CEO salaries that are larger than the average American will earn in their entire lifetime.
These companies want to turn around? Have the CEO give up half of their pay this year and turn down their bonuses (which they don't deserve). Cap salaries at $300,000. I don't think anyone would argue that is a poorly paid job. Just do it until this little crisis is over. Then feel free to resume your hedonistic life.
Who the hell are these politicians representing anyways?
Government helping Citi using our,taxpayers money,and Citi in return for us rising his interest rates for CC astronomicaly...What such a nice deal for taxpayers:))))
ReplyDeleteWow, Citi presses the luv button and gets a $300 billion CLI and all I get is the form.
ReplyDeleteThe largest subprime mortgage issuer in the US? The Treasury! I think we can all start to realize the "subprime" debacle was a charade masking the real problem - CDS's and gross overcompensation GM style at most major banks. And once again the smart money that was in the know late Friday will make a killing today.
ReplyDeleteone can argue that they are "too large to fail", but I could almost argue that they need to fail because they are too large.
ReplyDeleteWhen a handful of financial institutions can bring down an entire economy, then maybe we need to go back to stronger regulations of what commercial banks, lending banks, and investment banks can do. After major deregulation, all these banks look alike and grew and grew until they became their own monster.
I say, save them, but then break them and every other financial institution down into smaller pieces. My 2 cents, pre-coffee. I reserve the right to argue with myself at a later time and reverse my opinion for no apparent reason.
How can the government NOT give money to the Big 3 at this point? Citi, Wamu, Morgan Stanley, Lehman, Bear, Amex, GMAC, GEMB and more have all essentially failed to the point that without government intervention they were done. Why aren't we bailing out Circuit City that DIRECTLY employs over 40,000 people and indirectly several hundred thousand? Why are we only bailing out Wall Street and why are they allowed to turn around and stick it to the american taxpayer hours later?
ReplyDeleteAnd don't look now, but the homebuilders are begging for a bailout too.
ReplyDeleteLook, this will never end as long as we continue to bail out sectors. Not saying that the homebuilders are getting a bailout, but I expect to see more requests for one.
Well, we can see what the market thinks of this move. One, it's breathing a sigh of relief. And, two, the stock is up nearly 70% right now.
ReplyDeleteEnough said.
Not only are the homebuilders begging but the city of Atlanta is now has their hand out. Seriously?? We cannot keep bailing out...this will come back to haunt us. Oh wait...I think that is what is happening now.
ReplyDeleteDM, Citi got a financial review. Upon further review, the company got its limit upped. Of course, if our financials looked like Citigroup's, we would have had all of our credit cards shut down.
ReplyDeleteJG, California will be next. It will need a massive bail out. California is too large to fail. (Big grin.)
ReplyDeleteGreen, the U.S. Treasury is the biggest holder of subprime assets now.
ReplyDeleteDoes anyone know of an entity that currently holds more garbage?
CNBC is covering it pretty well again just saying nobody has any clue what the marks are on the 300 billion. Basically it may already be worth next to nothing.
ReplyDeleteCM, I don't believe bailouts are the answer but where do we draw the line? Circuit City with 2-3 billion at low rate loans would rebound and benefit consumers and their 40k+ employees but they won't see a dime. Instead we throw money into the fireplace known as Citi/AIG and don't think twice. It's beginning to get disgusting, we really are doing a disservice to the average american.
Speaker Pelosi wanted a "plan" from the Big 3 to give 3 businesses 25 billion. Why are we giving Citi 30 billion and guaranteeing 280 billion without a hearing? Why the double standard?
Green, we don't need a hearing. That hearing has already taken place -- when Paulson got TARP. Too late for that. That deals already done. Now Paulson can dole it out any way he'd like.
ReplyDeleteRegarding Circuit City, I hear you. But the government would argue that it's not an essential business. If Circuit City goes away, it impacts employees, sure, but it doesn't ripple through the entire economy in less than 24 hours. That's the distinction the government would make.
Because TARP didn't contemplate a bailout of non financial companies (except the government did make an exception and bring the insurance biz in), that's why you have the Big 3 coming to the table.
I'm with you, though. My disgust is just a little further than yours, though. My problem mostly comes from the "blank check" nature of these bailouts.
See my story on "That Money Isn't Leaving The Vault." http://www.creditmattersblog.com/2008/11/that-money-isnt-leaving-vault.html
Very irritating.
CM, I was speaking hypothetically but it goes again to the fact that our elected leaders are sorely lacking the business experience to comprehend the situation.
ReplyDeleteSpeaker Pelosi's bio on Wikiepedia doesn't list any real world work experience. Senator Reid hasn't apparently worked in the private sector in 40 years. This carries through on the other side of the aisle too. Perhaps part of the problem is that the people making decisions are multi-millionaires who haven't worked a private sector job in decades and have no clue how tough it is on the outside?
This is rapidly becoming a fiasco. All we've done is condone the rampantly bad behavior that allowed CEOs of failing businesses to make millions and in some cases billions.
How is giving Citi 30 billion going to make them profitable? There is only one answer, massive increases to average consumers which we are already seeing. We pay for this twice, once on the bailout and again every single time you get a credit card or loan from these businesses for the next twenty years.
Green, I think it's bigger than anyone can imagine. My guess is that our government had -- and has -- no idea how large this situation is. The government continues to be caught off guard.
ReplyDeleteThe politicians are morons. These financial types could hoodwink them in a New York Minute.
As for the profitability of Citibank, this bailout won't make them profitable. But it will prevent a total unwinding of Citi.
And you're absolutely correct. The taxpayer is going to pay for this twice. Once in the form of higher rates and fees on their credit cards. And then second when the bill comes due for all of this money that's being created for the financial sector.
Really? Homebuilders? I think I am just going to go lay down under my blankets and not come out for a few years...seriously we are about two steps away from individual consumers asking for a bailout. I mean why not...we bailed out everyone else. I think the government should just pay for everything.
ReplyDeleteCan't afford your rent? Call Uncle Sam! Can't go to Disneyland...Uncle Sam will buy your ticket! Credit card debt dragging you down? Uncle Sam will pay it off and you don't have to worry....unreal.
Lion, yep. The homebuilders are out looking for a handout now.
ReplyDeleteThe homebuilder bailout, though, is a nonstarter in its current form. The homebuilders want to stimulate the housing market again. LOL.
ReplyDeleteDon't think so. That's what got us here.
Go back to the drawing board.
homebuilders will be fine once the market gets jump started and the new neighborhoods with 85% vacancy (never sold) rate start to fill up.
ReplyDeleteBut, Jen, they need their bailout right now. It's just $250 billion. Drop in the bucket.
ReplyDelete/sarcasm
"stimulate the housing market"
ReplyDeleteAlso known as screwing us all...
We already had the housing market stimulated. We know how that turned out.
ReplyDeleteSec. Paulson may ask Congress for the second phase of TARP ($350bn) in an effort to boost consumer credit.
ReplyDelete"Treasury and Federal Reserve officials are working on an effort to buttress the market for securities backed by auto, student and credit-card loans, Paulson said last week. He’s also assembling an office to address mortgage foreclosures."
http://www.bloomberg.com/apps/news?pid=20601087&sid=auoDLq8ffHFs&refer=home
CM or anyone, what exactly does that mean? Is he talking about aid to those who hold related securities or the consumer?
Scott, he's shifting to the consumer. It's help for the consumer. I think I had a blog entry on this.
ReplyDeleteScott, I buried the story in my Cartoon of the Day:
ReplyDeletehttp://www.creditmattersblog.com/2008/11/cartoon-of-day-does-government-know.html
Citigroup just received a Scorewatch alert. Their Fico score has increased due to balance decreases.
ReplyDeleteCM, Thanks for the link. It sounds like they're all over the place with regard to any specific plan.
ReplyDeleteSurfer, nice. Nice.
ReplyDeleteScott, no problem.
ReplyDeleteBy the way, I just posted a new blog entry about the home builder bailout proposal. It's on the site now.
http://www.creditmattersblog.com/2008/11/builders-make-plea-for-federal-aid.html
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