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Paulson and Bair: "Wait, no that buying toxic asset thing, let's try that again..."



November 24, 2008 – Comments (9)

Wasn't it just a week ago that Paulson said we didn't need to buy up or guarantee toxic assets, that simply handing out money to shore up capital was good enough? Citi has gotten GOBS of extra capital, both from government and private overseas bagholders, and it now needs another $20-$250 billion worth of taxpayer largesse?

Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies -- the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. -- will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

The plan would essentially put the government in the position of insuring a slice of Citigroup's balance sheet. That means taxpayers will be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.

In exchange for that protection, Citigroup will give the government warrants to buy shares in the company.

In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the the broader U.S. banking-industry bailout.

Another $20, $50, $200 billion here... Someday we'll be talking about real money, I suppose. And I'm sure that this is:

1) For our own good

2) A great deal for taxpayers, who will make loads of money on these toxic assets.

What this really looks like is a deal with 3 devils. Citigroup gets to survive another month or so. Paulson gets his butt out of the wringer for a month or so. Bair gets her stuff out of the wringer too, and gets to force Citi to cleave to her socialist manifesto of free mortgages for all...

9 Comments – Post Your Own

#1) On November 24, 2008 at 11:04 AM, ByrneShill (82.56) wrote:

This bailout is nut. The nuttest (haha, new word!) of all the bailouts so far. Citi should belong to the US govt by now. Heck, if you're gonna pay for its failure, it might as well belong to you. And if you're gonna pony up 20+250 bil to keep it from sinking, you should get the equity position that comes with it, which is pretty much all the company.

This one is just nut. And it isn't really fair either to other banks who managed their money more conservatively and should now have the oppotunity to pick up the pieces on the cheap.

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#2) On November 24, 2008 at 11:48 AM, WaveDoc (< 20) wrote:

Ah, the TARP - rammed thru Congress on the threat of financial Armageddon if the banks don't start lending.  $125B crammed down the throats of the 9 largest banks.  Whoops!  Just about what was in the bonus pool for the 9 largest banks.  (Damn that reporter who broke the story!). 

Still no increase in lending.  Hmmm - maybe there are still some problems they haven't disclosed. 

Wait - I see some clarity on the horizon.  Yes, it's getting clearer.  I can't quite make out the logo, but it's getting closer so I can almost . . . yes, I can see it!  No!  Can't be! 


 Now a somber question.  Who's next?

 Seth - as always, a great post. Look forward to your take on mark-to-market accounting changes.  Will it happen?  Will it help?  


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#3) On November 24, 2008 at 11:54 AM, TMFLomax (89.33) wrote:

I thought Paulson looked amazingly nervous and skittish while Bush was talking this morning. I mean, with good reason of course.

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#4) On November 24, 2008 at 1:02 PM, jgseattle (26.04) wrote:

Byrne - I agree with you.  It seems to me the US is again privatizing profits and socializing risk.  If the government is going to do these types of investment as the investor/lender of last resort it seems they sould be able to extract a larger pound of flesh. 

C - We need money.

gov - really, have you gone to the market to raise capital, private investors, your sheik?

c - yes but it is not enough.

gov - really how much do you need?

c - well we have $300b in mortgages that are iffy, we have a large credit card operations, and a lot of diriviatives that are difficult to value.  So we need $20B plus the full faith and credit of the US government.

gov - what is your market cap today?

C - $30B

gov - so you have about 10 billion shares outstanding?

c - yes

Gov - ok we want an 80% position for the credit backing, and we will loan you $20 B that is senior to all other debt at LIBOR + 500.

c - we cannot do that.

gov - ok, talk to us on Friday when your shares are at $1/each

c - ok, ok

I wonder what would be C options to a conversation like this.  They have to talk it. 

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#5) On November 24, 2008 at 1:54 PM, ByrneShill (82.56) wrote:

Well, I just rechecked an article about the bailout, and something stroke me as odd: if buffet can get 10% from GE (which is financially way more sound than Citi), why can't the govt get more than 8% on their prefered?

In return for the latest intervention, the government will receive a larger stake an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

In other words, they issued 20bil in prefered stock (at 8%) and bought CDS on their own debt at 62¢/100k$ (7B*8%/300B*100k). This is just completely nut. Honestly, the next time the US govt wants to negociate something they can call me, I'll get them a much better deal (one that doesn't involve giving the money away for nothing). I'll charge a 0.01% fee on the transaction. Really, Citi should now be a property of the US govt, marked for sale to the highest bidder.

I'm stunned. This is by far the worst deal the govt has made since the crap hit the fan. There must be some crazy good lobbyist at Citi HQ.

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#6) On November 24, 2008 at 2:23 PM, websmith1 (< 20) wrote:

Unlike the auto bailout, this bailout doesn't allow us to keep jobs or generate commerce plus, they were not adversely affected by the economic crisis. They caused it. After already giving them $25 billion, they are still foreclosing on our homes, charging us loan shark rates on our credit cards, and refusing to loan money to business resulting in more lost jobs and no commerce whatsoever. We should first demand a management change and a plan. What is to guarantee that, after we bail them out, they don't just go out and do the same things that got them to this point all over again only to have us left holding a lot of worthless stock. Get rid of those corporate jets and the high salaries and bonuses. Otherwise this is just more money after bad.

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#7) On November 24, 2008 at 8:44 PM, starbucks4ever (78.50) wrote:

If only they really foreclosed on homes and refused to loan money, I would support a bailout of such a wonderful institution. Inflated prices and too much credit - that was the cause of the crisis.

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#8) On November 24, 2008 at 10:59 PM, Option1307 (30.66) wrote:

This one really hurt and there is no end in sight...

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#9) On November 25, 2008 at 11:49 PM, redneckdemon (< 20) wrote:

CYOAopolis seems to be a much more fitting name for our country these days.  Our states may be united, but the states don't have a damn thing to do with running this country, it seems.

I fail to see how giving a company more money then the company itself is worth is anything short of STUPID.

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