Monday, November 24, 2008

Details on Citigroup (C) Bailout

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As I said with AIG and Fannie/Freddie - what is sold to us as the initial cost of the bailout will increase tremendously - we were sold on $85 Billion for AIG (already up to $150 Billion range) and we've been sold that Fannie/Freddie will cost "up to $200 Billion" (and with how I envision these two entities being used in 2009/2010 to reconfigure the entire housing base in the U.S. that's going to be peanuts)

Before the main post - some questions I'd like to know the answers to
(a) did CEO Pandit fly in a private jet when he had to explain to Congress why he needed the money? (that's a rhetorical question - because we bail out financials, no questions asked)
(b) did CEO Pandit unveil a business plan to Congress explaining how he'd use the money? (again a rhetorical, because he doesn't even need to show up)

Here are some specifics with Citigroup (C) - it is being sold as a "$20 Billion" infusion - wow, that's just the surface - news reporters really need to work harder than that. Also, I want to stress to the non financial type readers, off balance sheet accounting is a complete joke. It brought down Enron. Basically it is hiding liabilities away from the public eye. Our government now does it - i.e. the war is not considered part of our budget so it's "off the balance sheet" - hence when they toss around deficit numbers we EXCLUDE minor things like... wars. Many of our banks appear to be doing it as well. Citigroup has $2 trillion of 'assets' (which are being written down by the quarter - hence I use the word assets lightly) ON it's balance sheet and another $1.2 trillion OFF the balance sheet. That just show's you the magnitude of this 'hiding'. Why the rules allow this is beyond me - I am sure there was some lobbying effort behind it and as a government that does this, I guess we cannot preach to the corporations that they cannot follow the government lead. It is pathetic however and why you lack the things we need to solve this - transparency and trust. This speaks to the greater nature of the flaws in our entire financial system - but as you know "self regulation" is best since the heavy hand of watchdogs only stifles innovations! So we've been sold for a few decades. But when corporations make the rules you get buildups over the long term, until the dam breaks. And then the people are asked to clean up the mess.

It also shows why the TARP program of $750 Billion was stunningly insufficient (something we noted at the time) under the original guise to "buy up distressed assets" - in this one bailout alone we would have to buy $300 Billion - or nearly half the TARP's money. So that's out of $3.2 trillion of assets both on and off the balance sheet and as this recession continues and more consumers go off the wagon, as do business loans, we know that more of that $3.2 trillion goes bad. So $300 Billion would just be the start. And let me remind - this is ONE bank.
  • In exchange for $27 billion in Citi preferred stock, the government will inject $20 billion of capital in the struggling firm and guarantee $306 billion in troubled mortgage assets.
  • The deal is complex in its structure, but when all is said and done the government is on the hook for about $249 billion in toxic mortgage-backed assets in exchange for $27 billion in Citi preferred stock. (again the irony in this is amazing - the only reason the stock has any value is the backstop on the "assets"; so as compensation for massive losses we face down the road we get paid in stock - it is laughable when you think about the circular nature of it all)
From Clusterstock

Here are some highlights of the stunningly complex plan. (You can read the joint statement by the Fed, FDIC and Treasury here. Citi's press release is here.)

  • A huge amount of troubled assets backstopped by the government. It's no wonder that Hank Paulson and other had to cancel the original TARP plan to buy up troubled assets. A Citi alone there are apparently over $300 billion of assets that needed to be backstopped. That's forty percent of the entire TARP at one bank.
  • The Four Step Backstop. The backstop of the troubled asset portfolio has a four step waterfall for losses.
  1. The first $29 billion of losses from the portfolio will be absorbed by Citi entirely.
  2. The Treasury Department will take 90 percent of the next $5 billion of losses, with Citi taking the rest.
  3. The Federal Deposit Insurance Corporation will step in and take 90 percent of the next $10 billion of losses while Citi absorbs the balance.
  4. Losses beyond that will be taken by the Federal Reserve in the 90 percent government role. Note that Citi is still supposed to take the remaining 10 percent at this stage but it's hard to believe that anyone really thinks Citi would be able to take any more losses once it had written down $40 billion more in this portfolio.
So effectively we are splitting the coming losses into 3 different federal agencies (technically one could argue if the Federal Reserve is a federal agency I suppose) - but really it's a game of hide the losses under the coconut shell. It comes back to our money at the end, no matter what agency it's sitting in to absorb the losses.

I don't have in front of me the off balance sheet assets for Bank of America (BAC) or JP Morgan but I'd be curious to find out - can we really believe the next round of panic won't target BAC? Or as the next supermarket is now called Bank of America; Merrill Lynch; Countrywide Financial.

On another note - tomorrow (I believe) is the release of the new Troubled Bank list (3 banks were taken out this weekend) - it might get a lot of attention [Aug 26: FDIC Troubled Bank List] but frankly the FDIC did not have IndyMac on the list before it went under and as I wrote in on September 15th. [Sep 15: Wilbur Ross: Possible a Thousand Banks to Go]

They don't have Washington Mutual (WM) which looks destined to be delivered to JPMorgan (JPM) in a "arm twisting" by government on their troubled bank list. So whose to believe anything coming out of these same folks who told us "subprime is contained" in spring 2007. I don't know whether they have been ignorant or deceitful over the past 18 months; and frankly I don't know which scares me more.

You all know what happened to Washington Mutual - the largest Savings & Loan in the country - which was not on the last quarterly list. Hence I think this list, while generating discussion and hubbub - has proven to be a false idol.

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