The U.S. taxpayer will now take most losses on a $300 billion package of bad debt Citigroup is holding:
Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.
Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.
In the deal the government will get some likely worthless equity in Citigroup.
The question I don't see anybody touching is for what percentage of the notional value of the loans this deal was done. The deal terms (pdf) say:
Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).
So who will set those values? Who will supervise those who set these values? There are billions of taxpayer dollars at risk in each percentage difference of these evaluations. Where is the reporting on that?
Instead we are subjected to such nonsense:
Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup's balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.
Ahem, does the Citigroup official balance sheet matter at all?
In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren't reflected there. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books.
Citigroup is dead. There is no way the company can survive without a massive default. It will not be the only one. Others are lining up:
Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.
"The problem is that other banks would want to get in line" for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. "Is there enough money to do that?"
Only if you print it ...
And who is pulling the strings behind all this?
Inside Citigroup’s Park Avenue headquarters, the mood was tense. Through the weekend, Robert E. Rubin, the former Treasury secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M. Paulson Jr.
Still hoping for change in the next administration?
It is testament to former Treasury Secretary Robert E. Rubin’s star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.
The president-elect’s choices for his top economic advisers — Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director — are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin’s chief of staff in the Treasury Department who followed him to Citigroup, and James P. Rubin, Mr. Rubin’s son.
All three advisers — whom Mr. Obama will officially name on Monday and Tuesday — have been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation, a combination that was credited with fueling the prosperity of the 1990s.
The correct version of the last sentence would have been: "a combination that was credited with fueling busts and bailouts of 2008, 2009 and 2010".
With this Citigroup bailout and the prospect of the incoming team of Wall Street gangsters, the chance of a default of the U.S. government on its debt are now higher than ever.
Rubin has always been a prince in a princely line--an heir with the brains, charm, looks and confidence of a prince. And people in power have yet to accept the possibility that the man might be weak, and that he cannot bear to have his hands soiled by failure. And so they "enable" him, letting him continue in his princely ways. They convince themselves that he's wise, and that his courtiers are also wise. He has no apparent motive to act corruptly, and his hands are always clean.
But the man is not wise-- and how could it be otherwise, since life has never tested him?--and he throws his weight around when he wants to have his way. Whatever he touches turns into lead. Eventually. To be clean, in Rubin's case, is a matter of not being watched, of not being seen, of not being called to account.
Rubin, and only Rubin, was responsible for Summer's appointment as President of Harvard by the Harvard Corporation (which picked Summers over a far stronger candidate). When Summers nearly wrecked the College, Rubin refused to address the folly of the appointment. It's said that he dealt with the problem by skipping the monthly meetings of the Corporation (a committee of seven princely individuals). Only after the Faculty struck back really hard, in an organized fashion after a long and bitter fight, did Summers himself finally withdraw. Rubin was nowhere to be seen, and the College has only started to recover.
This approach to things--running things without running them, forcing decisions without being held accountable--is precisely the way Rubin handled his Citicorp position from the start, as an adviser without day-to-day responsibilities--one who could then claim, as things began to go sour, that only a hands-on adviser could have known that things might indeed be going sour.
People should run screaming from the room when Rubin walks in. As indeed they do, long after the damage is done.Posted by: alabama | Nov 24, 2008
Source: Moon of Alabama
The rule here continues to be the same as it has been throughout this crisis: the people who caused the crisis must be left in charge of the organizations, the executive class running financial institutions must not be significantly harmed.
Because these folks are not competent, this is clearly the wrong decision, yet again. If they were capable of manging Citigroup properly, they would have done so. They didn't because they aren't able to do so. The correct decision is to simply nationalize the firm and replace the key executives. Then, in the case of Citigroup, which is too large to be effectively managed, it should be broken up.
I note that Citi was the bank the FDIC wanted to have take over Wachovia, instead of Wells Fargo. The FDIC was very insistent on that despite Wells Fargo making a far better offer and not needing government help. Citi now being in trouble proves what many of us noted then, that Citi was not the best candidate and that the FDIC's insistence was very odd, raising questions of improper influence or incompetence. source
Citigroup's single largest shareholder is Prince Al-Waleed bin Talal of Saudi Arabia, who has a 14.9% stake he bought a substantial tranche in Citicorp. At the end of 1990 he bought 4.9% of Citicorp’s existing common shares for $207m ($12.46 per share)—the most that he could without being legally obliged to declare his interest.
In February 1991, as American troops stationed in Saudi Arabia were preparing for war with Iraq, the prince spent $590m buying new preferred shares, convertible into common shares at $16 each. This amounted to a further 10% of Citicorp and took his stake to 14.9%. source
So why save Citi and not GM? It’s not clear. In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities. Add parts suppliers and their employees, and the number of middle-class and blue-collar jobs dependent on GM is many multiples that of Citi. And the potential social costs of GM’s demise, or even major shrinkage, is much larger than Citi’s — including everything from unemployment insurance to lost tax revenues to families suddenly without health insurance to entire communities whose infrastructure and housing may become nearly worthless. I’m not arguing that GM should be bailed out; as I’ve noted elsewhere, GM’s creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well.
Nonetheless, Citi is about to be bailed out while GM is allowed to languish. That’s because Wall Street’s self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy — the Treasury and the Fed. Their job, as they see it, is to keep the financial economy “sound,” by which they mean keeping Wall Street’s own investors and creditors happy. source
A little satire never hurts anything.
By Andreas Hippin
November 21 (Bloomberg) -- The Somali pirates, renegade Somalis
known for hijacking ships for ransom in the Gulf of Aden, are
negotiating a purchase of Citigroup.
The pirates would buy Citigroup with new debt and their existing
cash stockpiles, earned most recently from hijacking numerous ships,
including most recently a $200 million Saudi Arabian oil tanker. The
Somali pirates are offering up to $0.10 per share for Citigroup, pirate
spokesman Sugule Ali said earlier today. The negotiations have entered
the final stage, Ali said. ``You may not like our price, but we are not
in the business of paying for things. Be happy we are in the mood to
offer the shareholders anything," said Ali.
The pirates will finance part of the purchase by selling new Pirate
Ransom Backed Securities. The PRBS's are backed by the cash flows from
future ransom payments from hijackings in the Gulf of Aden. Moody's and
S&P have already issued their top investment grade ratings for the
Head pirate, Ubu Kalid Shandu, said "we need a bank so that we
have a place to keep all of our ransom money. Thankfully, the
dislocations in the capital markets has allowed us to purchase Citigroup
at an attractive valuation and to take advantage of TARP capital to grow
the business even faster."
Shandu added, "We don't call ourselves pirates. We are coastguards and
this will just allow us to guard our coasts better."
not only that i dont think that anyone would wanna have anything to do with the banking institution if it were owned and operated by pirates. source