Citigroup Government Bail Out A Bad Idea?
After injecting $25 Billion into Citigroup (C) recently the US government has announced they will invest another $20 billion into the struggling bank and guarantee $306 billion in toxic assets. The pressure for saving Citigroup came on hard last week after the stock closed under $4 a share which was a 16-year low.
Citigroup currently has over $3 trillion in assets and 200 million client accounts in over 100 different countries. Congratulations taxpayers, now we own a part of this is “on the brink of failure” worldwide brand too.
From WSJ:
After a weekend of marathon talks between Citigroup executives and top federal officials, the parties late Sunday night nailed down a package in which the government will help protect the company from its riskiest assets.
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 broader U.S. banking-industry bailout.
The problem with this plan is that Citigroup has identified its troubled assets, but investors have been worrying there are much more yet to be reported. The bill to save Citigroup may get much steeper as more toxic assets reveal themselves on Citi’s books.
With this being the case the situation will more than likely turn into an American international Group (AIG) gig where the bill continuously steepens over time.
And while no defined executive compensation plan was implemented as part of the agreement, Citigroup did agree to “comply with enhanced executive compensation restrictions.” What that exactly means no one really knows.
Included was a nice interactive chart with key Citigroup dates over the last year:
Source:
U.S. Agrees to Rescue Struggling Citigroup
Wall Street Journal, Nov 24th, 2008
David Enrich, Carrick Mollenkamp, Matthias Rieker, Damian Paletta, and Jon Hilsenrath
