Citi: Another Bad Deal for Taxpayers

Over the weekend, the government decided to guarantee over $300 billion in Citigroup, Inc. (C - Analyst Report) assets -- and let me assure you that those are the most worthless assets on C’s books -- for up to 10 years in the case of residential backed assets and five years for non residential backed assets. Citi is on the hook for the first $29 billion, and after that the government absorbs 90% of the losses.

In return, the government gets $7 billion of preferred stock which pays 8%, and gets warrants for $2.7 billion of common stock. However, the strike price on the warrants is so high that Citigroup’s stock price has to rise 281% from Friday’s close before they are in the money.

We finally get some real restriction on the payment of common dividends (no more than $0.01 per quarter for three years).  Taxpayers get no real voting rights, unless Citigroup misses dividend payments on the preferred for six quarters.  Oh, and all those geniuses running Citi that got it into this mess get to keep their jobs. The same cannot be said of the 52,000 tellers and back-office folks who are really responsible for this mess.  

The amount of cash that the taxpayers have thrown into the money pit that is Citigroup, Inc. exceeds its current market value. If by some miracle the economy manages to pull through this mess and Citi survives, the taxpayers get a very limited reward (but the Saudi prince makes a fortune).

The "Citi" never sleeps, and it doesn’t let anyone else sleep peacefully either. The bounce in the market today is a sucker's rally.

Yes, we needed to save the institution that is Citigroup; its failure would make the failure of Lehman Brothers look like a little bit of market indigestion rather than the massive heart attack that it was. However, why, when bankers come hat-in-hand, can’t we have somebody negotiate on behalf of the taxpayers? Why does the auto industry get raked over the coals (they should be, but the double standard here is glaring) in congressional hearings, while bankers get sweetheart deals over the weekend with no scrutiny.

It should not be that hard to negotiate with these people. This is your kids' money here, folks -- yours was gone a long time ago.  Furthermore, the involvement of Tim Geithner (Obama’s pick for Treasury Secretary) in crafting the package does not leave me feeling good about the future.

The complete terms of the deal can be found here: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081123a1.pdf

 
 

Read the full analyst report on C