Wall Street Manna

An irreverent look at Wall Street

Monday, November 24, 2008

Citigroup offloads it's dreck to the taxpayer

That in essence, is what this Government bail-out of Citi actually is.

$306 billion of assets are ring-fenced, with Citigroup taking the first $29 billion of losses. After that, the Government eats 90% of the losses in excess of that $29 billion.

This guarantee costs Citi a $7 billion preferred stock with 8% rate.

But the Government lends Citi another $20 billion, in a 8% perpetual preferred, convertible in stock or cash.
http://online.wsj.com/public/resources/documents/citi-term-sheet-1123.pdf

All Citi has to do is modify mortgages like they were previously supposed to do, and cut their dividend to a penny, and no one responsible for this mess loses a job.

The dividend cut will save Citi $3.3 billion, but Citi will pay the Government $2.16 billion in interest each year. ($27B x .08%=$2.16 billion)

So the Government lends Citigroup $27 billion, and Citigroup saves a billion from dividends that go to shareholders by cutting it to a penny. That money is now given as interest to the Government. The $29 billion of losses are already taken; the only question is when they are going to be recognized.

But now Citigroup's capital position increases by $16 billion because of the Government backstop of the toxic assets.

Now Citi has gotten rid of their most toxic junk, and the taxpayer has picked up the tab. The $120 billion of additional losses that would exist on this dreck is now put in the warehouse that never was, and now that mortgage modifications are on the Government's dime, maybe Citi will actually give a concession to a homeowner.

Assuming that Citigroup already knew what their most toxic assets were, then this is a step in the right direction. And just like AIG went back to the well twice, so has Citigroup. Didn't this "healthy institution" just get $25 billion from the TARP? Now they need another $27 billion, and guarantees on $300 billion of mortgages.

What this does show, however, is that we have a new monoline insurer, and he charges below market rates.

And his name is the US taxpayer!

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