Sunday, November 23, 2008

Citigroup Bailout Plans Forming

If its Sunday night in America, it can only mean one thing - the government is hard at work spending tax dollars to offset years of lax oversight and political ideology. In the "we make it up as we go along" strategy, two newspapers report on different versions of a bailout. One version seems to imply once Citigroup (C) surpasses X amount of losses, you - dear taxpayer - will pick up the rest. And going by the AIG (AIG) example where the first estimate of losses was laughable, this will create an unending abyss of liability. In return we get shares of Citigroup! Lucky us! So we get more shares in a sinkhole whose losses we are going to be on the hook for. Excellent plan! As with AIG, why not just skip these intermediate window dressing steps and just nationalize it so we can call a spade a spade.

From New York Times
  • Federal regulators were considering a new rescue for Citigroup on Sunday, a step that could mark a third leg of the government’s broader efforts to bolster the nation’s financial industry, according to people briefed on the plan. Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to these people, who spoke on the condition that they not be identified because the plan was still under discussion.
  • If the government should have to take on the bigger losses, it would receive a stake in Citigroup. The banking giant has been brought to its knees by gaping losses on mortgage-related investments.
  • If approved, the plan could serve as a model for other banks, heralding another shift in the government’s morphing financial rescue. (excellent! The US is now a financial mutual fund)
  • Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, which are instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders, since they would not immediately dilute the value of their investments as much as preferred stock.
From the Wall Street Journal comes a slightly different view - the celebration of essentially off balance sheet accounting - create fake entity out of thin air and stuff said entity with bad debts... sort of like Hank Paulson's Super SIV plan from over a year ago. Just keep old ideas around long enough and eventually you can re-use 'em. Look in the sky - it's a bird, it's a plane - no its SUPER SIV!
  • Citigroup Inc. is nearing agreement with U.S. government officials to create a structure that would house some of the financial giant's risky assets, according to people familiar with the situation. While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank." That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said. (and who would be responsible for it... hmmm)
  • The bad bank also might absorb assets from Citigroup's off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company's balance sheet. Citigroup also has about $2 trillion in loans, securities and other assets on its balance sheet as of Sept. 30.
CNBC asks so what happens once we set the precedent with Citi?
  • The problem with buying the assets from Citi is political: People close to the deal know that other firms will line up and ask the government to purchase their troubled assets as well.
Still developing folks - just know that your grandchildren are on the hook for even more....really the bailouts seem to be endless.

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