Chalk another successful bailout deal up for those excellent negotiators, Paulson and Bush.
Citigroup graciously allowed the government to give it an injection of $2.6 billion in cash by buying 254 million newly issued shares of Citibank common stock, which is currently trading at just over $5 per share, for the bargain price of only $10.61 per share!!!! WOW! They're only paying TWICE the price that it would cost to buy the shares on the open market! What a bargain! We may NEVER see another President, Treasury secretary or Fed chairman with bargaining skills of that caliber!
In exchange for Citi's generosity in negotiating such a great price for their stock, our government is going to guarantee $306 BILLION dollars worth of risky loans, at least 20% of which, or about $61 BILLION dollars' worth, are expected to fail. We, the taxpayers, are just on the hook for any losses by Citigroup for the next 10 YEARS. But don't worry; the government is only liable for 90% of the losses; CITI will still be on the hook for the other 10%. Well, sort of.
I like this little passage in the agreement: "Federal Reserve funds remaining pool of assets with a non-recourse loan"
The way I read that is to mean that the Fed will loan Citi the money to pay its 10% of the losses. The Fed will have no recourse if Citi decides not to pay it back. I really like that. Great negotiating skill on Paulson's part. I'm surprised he didn't give them the keys to the White House while he was at it.
In another grand triumph of hard bargaining on our behalf, the FED gets to buy $20 BILLION in NON-VOTING Citi preferred stock. Yay! And, if Citi decides to, it can convert the preferred stock into common stock later, presumably at the same $10.61 per share.
Due to the method of calculating the risk involved in the $306 BILLION dollar government guarantee, Citi makes an immediate windfall of $16 BILLION dollars. And just in time for Christmas bonuses! One caveat: Paulson has to OK the bonuses as "reasonable" before they are paid. Since he made about $100 million per year during his tenure at Goldman Sachs, I just can't see him deciding that bonuses of $10 or $20 million each would be unreasonable.
Oh, yeah. Citi gets a "blank check", too, in the form of unlimited access to the Fed's discount window. To quote the press release:
"In addition to its extensive access to existing liquidity sources, Citi
has been provided expanded access to both the Federal Reserve's Primary
Dealer Credit Facility and the discount window, resulting in strong
additional liquidity resources should they be needed. Citi also has
access to the yet-unused Federal Reserve's Commercial Paper Funding
Facility and intends to issue debt under the FDIC's Temporary Liquidity
Guarantee Program."
Then there's the TARP. To quote the press release:
The program significantly strengthens Citi's key capital ratios by
generating approximately $40 billion of capital benefits as follows:
$20 billion from the TARP investment.
$3.5 billion, the portion of the $7 billion of preferred stock fee recognized for capital purposes.
$16 billion of capital benefits resulting from the asset guarantee.
Gee, it looks like this may end up costing us over $100 BILLION dollars. Since Citi is notorious for under-reporting risk, some outside analysts have mentioned that the real risk on those bad loans may be as much as 40%; Citi's bailout could easily top $200 billion before it's over. Makes the $25 billion for the Big Three bailout look kind of puny in comparison.
Did I mention that Bank of America is next in line for a handout? I can just see them out there, hat in hand, saying "Please, sir, can you spare a few hundred billion?"