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U.S. agrees to bail out Citigroup

SAN FRANCISCO (MarketWatch) -- The U.S. government agreed Sunday night to rescue Citigroup Inc. with a huge bailout plan that includes a $20 billion capital infusion, guarantees for up to $306 billion of Citi's troubled assets - and control of executive bonuses.

The agreement with beleaguered Citigroup whose stock had dropped more than 60% in the past week to a 16-year low, and which had lost $160 billion of its $180 billion market capitalization in the past year, came after intense weekend negotiations with the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., according to media reports.

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Chemy said:

A bailout for you (personal) or small business would make sense, and it would actually have a positive impact on the economy IMO.

If these big businesses went belly up wouldn't that benefit small business? Or would other businesses absorb the assets, employees and customers of the fallen corp and therefore would not have any negative impact whatsoever?

Am I missing something?

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November 23, 2008
1
Summary of Terms
Eligible Asset Guarantee
Eligible Assets: Asset pool consisting of loans and securities backed by residential real
estate and commercial real estate, and their associated hedges, as agreed,
and other such assets as the U.S. Government (USG) has agreed to
guarantee. Each specific asset must be identified on signing of guarantee
agreement. Assets will remain on the books of institution but will be
appropriately “ring-fenced.”
Size: Up to $306 bn in assets to be guaranteed (based on valuation agreed upon
between institution and USG).
Term of Guarantee: FDIC standard loss-sharing protocol: Guarantee is in place for 10 years
for residential assets, 5 years for non-residential assets.
Deductible: Institution absorbs all losses in portfolio up to $29 bn (in addition to
existing reserves)
Any losses in portfolio in excess of that amount are shared USG (90%)
and institution (10%).
USG share will be allocated as follows:
UST (via TARP) second loss up to $5 bn;
FDIC takes the third loss up to $10 bn;
Financing: Federal Reserve funds remaining pool of assets with a non-recourse loan,
subject to the institution’s 10% loss sharing, at a floating rate of OIS plus
300bp. Interest payments are with recourse to the institution.
Fee for Guarantee -
Preferred Stock: Institution will issue $7 bn of preferred stock with an 8% dividend rate
(under terms described below). $4 bn of preferred will be issued to UST.
$3 bn will be issued to the FDIC.
Management of
Assets: USG will provide institution with a template to manage guaranteed assets
This template will include the use of mortgage modification procedures
adopted by the FDIC, unless otherwise agreed.
Risk Weighting: Institution will retain the income stream from the guaranteed assets. Risk
weighting for assets will be 20%.
November 23, 2008
2
Dividends: Institution is prohibited from paying common stock dividends, in excess
of $.01 per share per quarter, for 3 years without UST/FDIC/FRB consent.
A factor taken into account for consideration of the USG’s consent is the
ability to complete a common stock offering of appropriate size.
Executive
Compensation: An executive compensation plan, including bonuses, that rewards longterm
performance and profitability, with appropriate limitations, must be
submitted to, and approved by, the USG
Corporate
Governance: Other matters as specified
November 23, 2008
3
Preferred Securities
Issuer: Citigroup (“Citi”)
Initial Holder: United States Department of the Treasury (“UST”).
Size: $20 billion
Security: Preferred, liquidation preference $1,000 per share. (Depending upon the
available authorized preferred shares, the UST may agree to purchase
preferred with a higher liquidation preference per share, in which case the
UST may require Citi to appoint a depositary to hold the Preferred and
issue depositary receipts.)
Ranking: Same terms as preferred issued in CPP.
Term: Perpetual life.
Dividend: The Preferred will pay cumulative dividends at a rate of 8% per annum.
Dividends will be payable quarterly in arrears on February 15, May 15,
August 15 and November 15 of each year.
Redemption: In stock or cash, as mutually agreed between UST and Citi. Otherwise,
redemption terms of CPP preferred terms apply.
Restrictions
on Dividends: Institution is prohibited from paying common stock dividends, in excess
of $.01 per share per quarter, for 3 years without UST consent. A factor
taken into account for consideration of the UST’s consent is the ability to
complete a common stock offering of appropriate size.
Repurchases: Same terms as preferred issued in CPP.
Voting rights: The Preferred shall be non-voting, other than class voting rights on (i) any
authorization or issuance of shares ranking senior to the Preferred, (ii) any
amendment to the rights of Preferred, or (iii) any merger, exchange or
similar transaction which would adversely affect the rights of the
Preferred.
If dividends on the Preferred are not paid in full for six dividend periods,
whether or not consecutive, the Preferred will have the right to elect 2
directors. The right to elect directors will end when full dividends have
been paid for (i) all prior dividend periods in the case of cumulative
Preferred or (ii) four consecutive dividend periods in the case of noncumulative
Preferred.
November 23, 2008
4
Transferability: The Preferred will not be subject to any contractual restrictions on
transfer.
Executive
Compensation: An executive compensation plan, including bonuses, that rewards longterm
performance and profitability, with appropriate limitations, must be
submitted to, and approved by, the USG.
Summary of Warrant Terms
Warrant: Institution will issue a warrant to UST for an aggregate exercise value of
10% of the total preferred issued to USG (in both transactions) ($2.7 bn).
Exercise Price: The strike price will be equal to $10.61 per share (the 20 day trailing
average ending on November 21, 2008). The warrants issued to UST are
not subject to reduction based on additional offerings.
Term: Ten years, immediately exercisable, in whole or in part.
DEPARTMENT OF THE TREASURY FEDERAL RESERVE BOARD
__________________________ _______________________________
CITIGROUP INC. FEDERAL DEPOSIT INSURANCE CORP.
___________________________ ______________________________

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Quote:

Citigroup Inc., doing business as Citi, is a major American financial services company based in New York City, NY. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate Travelers Group on April 7, 1998. Citigroup Inc. has the world's largest financial services network, spanning 107 countries with approximately 12,000 offices worldwide. The company employs approximately 358,000 staff around the world, and holds over 200 million customer accounts in more than 100 countries. It is the world's largest bank by revenues as of 2008. It is a primary dealer in US Treasury securities and its stock has been a component of the Dow Jones Industrial Average since March 17, 1997.

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phi1618 said:

Pris: Citigroup never got Wachovia, Wachovia went to Wells Fargo.

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Citigroup Bailout: Weak, Arbitrary, Incomprehensible
with 10 comments

According to the Wall Street Journal, the deal is done. Here are the terms. In short: (a) the government gives Citi $20 billion in cash in exchange for $27 billion of preferred on the same terms as the first $25 billion, except that the interest rate is now 8% instead of 5%, and there is a cap on dividends of $0.01 per share per quarter; and (b) the government (Treasury, FDIC, Fed) agrees to absorb 90% of losses above $29 billion on a $306 billion slice of Citi’s assets, made up of residential and commercial mortgage-backed securities. (If triggered, some of that guarantee will be provided as a loan from the Fed.) There is also a warrant to buy up to $2.7 billion worth of common stock (I presume) at a staggeringly silly price of $10.61 per share (Citi closed at $3.77 on Friday).

The government (should have) had two goals for this bailout. First, since everyone assumes Citi is too big to fail, the bailout had to be big enough that it would settle the matter once and for all. Second, it had to define a standard set of terms that other banks could rely on and, more importantly, the market could rely on being there for other banks. This plan fails on both counts.

The arithmetic on this deal doesn’t seem to work for me (feel free to help me out). Citi has over $2 trillion in assets and several hundred billions of dollars in off-balance sheet liabilities. $27 billion is a drop in the bucket. Friedman Billings Ramsey last week estimated that Citi needed $160 billion in new capital. (I’m not sure I agree with the exact number, but that’s the ballpark.) Yes, there is a guarantee on $306 billion in assets (which will not get triggered until that $27 billion is wiped out), but that leaves another $2 trillion in other assets, many of which are not looking particularly healthy. If I’m an investor, I’m thinking that Citi is going to have to come back again for more money.

In addition, the plan is arbitrary and cannot possibly set an expectation for future deals. In particular, by saying that the government will back some of Citi’s assets but not others, it doesn’t even establish a principle that can be followed in future bailouts. In effect, the message to the market was and has been: “We will protect some (unnamed) large banks from failing, but we won’t tell you how and we’ll decide at the last minute.)” As long as that’s the message, investors will continue to worry about all U.S. banks.

The third goal should have been getting a good deal for the U.S. taxpayer, but instead Citi got the same generous terms as the original recapitalization. 8% is still less than the 10% Buffett got from Goldman; a cap on dividends is a nice touch but shouldn’t affect the value of equity any. By refusing to ask for convertible shares, the government achieved its goal of not diluting shareholders and limiting its influence over the bank. And an exercise price of $10.61 for the warrants? It is justified as the average closing price for the preceding 20 days, but basically that amounts to substituting what people really would like to believe the stock is worth for what it really is worth ($3.77).

How does this kind of thing happen? A weekend is really just not that much time to work out a deal. Maybe next time Treasury and the Fed should have a plan before going into the weekend?

Update: Bloggers start trying to be funny, world to end soon:

Calculated Risk (on the aborted plan to divide Citi into a “good bank” and a “bad bank”): “Hey, I thought Citi WAS the bad bank!”
Tyler Cowen (on the same plan, which morphed into the government’s guarantee of the “bad bank” part of Citi): “Didn’t Paulson tell us just a few days ago that TARP wasn’t needed after all? Doesn’t this mean that Paulson should speak less frequently?”
Update 2: I made a mistake in the original post: although the government is getting $27 billion “worth” of non-convertible preferred stock, it is only paying $20 billion in cash. $7 billion is being granted as the fee for the government guarantee. Thanks to Nemo for catching this. (Note to self: No posts after midnight!)

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phi1618 said:

Citigroup actually claims not to need the bailout

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Now, most types of companies can ignore a low stock price, a bank depends on the faith and belief of the people it does business with

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Let's be clear - they have assets, but like any bank their assets are long term and their liabilities are short term.

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If confidence and trust leave the system, it's game over - for everybody, not just Citigroup.

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