Huge bail out of Citigroup is underway. According to the New York Times, “The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company.”
Citigroup has over $2 trillion in assets and has operations in over 100 countries. It is seen as too big to be allowed to fail.
Robert Reich, writing on his blog, says, “This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
“Meanwhile, more than a million workers in the automobile industry, along with six million mortgagees, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all.”
Excerpts from NYT:
- 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 exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.
- Citigroup will effectively halt dividend payments for the next three years and will also agree to certain executive compensation restrictions, which will be reviewed by regulators. It will also put in place the F.D.I.C.’s loan modification plan, which is similar to one it recently announced.
- Once the nation’s largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. …Citigroup’s shares have been hit particularly hard. A year ago they were trading at about $30; on Friday they closed at $3.77.
