Monday, 24 November 2008

Citibank Gets Bailout

The United Socialists of American government decided to bailout Shitigroup by guaranteeing $306 billion of Citigroup's assets and injecting a further $20 billion in equity.

Citigroup Gets Guarantees on $306 Billion of Assets

Citigroup Inc., facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the bank after its stock fell 60 percent last week.

Citigroup also will get a $20 billion cash injection from the Treasury Department, adding to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend. Citigroup rose as much as 41 percent in German trading today....

....The government’s preferred shares come with warrants to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment, according to a term sheet that accompanied the agencies’ statement. Citigroup is required to pay a quarterly dividend of no more than 1 cent a share for the next three years, down from 16 cents in the most recent quarter.

....Terms of the asset guarantees mean Citigroup will cover the first $29 billion of pretax losses from the $306 billion pool, in addition to any reserves it already has set aside. After that, the government covers 90 percent of the losses, with Citigroup covering the rest from assets, including residential and commercial mortgages, leveraged loans and so-called structured investment vehicles....

Let's be clear, Citigroup is insolvent, it's as simple as that, along with Fannie and Freddie and AIG they are being propped up by the government. I guess we should expect a pop in Citigroup stock folowing the bailout announcement, however you definitely wouldn't buy Citigroup stock for yield, since they won't be paying much in the way of diviends in the next 3 years. And if you think Citigroup is going to have any earnings in the next year, think again. They'll be taking writedowns and making losses for at least another 12 months.

Claims by CEO Pandit just last week that Citi had adequate capital ring hollow, and for anyone paying attention that was obvious. As I said yesterday and have been saying for a month, the capital injections under the TARP program would not even come close to being adequate because of the amount of losses linked to toxic assets on bank balance sheets.


Dean said...

There should be a law where any CEO of a bank who falsely says their balance sheet is fine can then be prosecuted for misleading the market. It means they are either lying through their teeth or they are just too thick to understand what's going on in the bank they supposedly run - either way they should cop a bit of time in gaol. What's your long term view of all these government bailouts? It seems to me that the main driver of profits over the last 10 years for banks has been off balance sheet activity and favourable repricing of now toxic structured assets. Banks are a totally different beast now as any risk taking will be heavily scrutinised or outright banned for the bailed out mobs. Where does the profit come from now? Citi rallied 58% this morning, seems ridiculous even if it is coming off a low figure.
Off topic - Obama promises $60 bill of infrastructure spending, time to get back on the mining/commodities trade?

The Fundamental Analyst said...

I'd actually like to see the US government take a holiday for a while. The Citigroup bailout is a disaster. Why prop up these insolvent institutions? If the government is going to get involved why not as a liquidator. The FDIC specializes in this area.

Just as there is overcapacity in the auto industry there is over capacity in banking. Jobs are going to be lost and companies will go out of business. The government is just postponing the inevitable, Citigroup needs to downsize or get sold off in chunks, but the government continues to kick the can down the road.

Citi is indebted to the US government for at least the next five years and can't pay divis for 3 years, it has essentially been nationalized. You ask exactly the right question, how do they generate profits now that the leverage yourself to the hilt environment is dead? Answer, they don't, banking is going to go back to a pretty boring business for a while I suspect.

Agricultural commodities I think will do well, but I'm not keen on mining companies with China rapidly slowing.

Reece Boroughs said...

The liquidation proposition is an interesting one, as long as the Government stepped in and prevented the flow on effect. The whole issue with these large and stupid US banks is the counter party risk equation and post the bankruptcy of Lehman's, the US seems not prepared to allow another "to big to fail" institution to go bankrupt.

The issue of course with letting Citigroup simply get bailed out is that the management that got them in the strife they are in simply stays in place. Capitalism should ensure that the strong sweep up the weak and the economy ends up with capable managers managing a greater share of the assets. What we have here is the same stupid individuals now are managing the same assets, only now they have absolutely no accountability, because every time they run out of money, it's a trip down to the Fed for some sweet TARP cash.

Scott said...

Hi Reece,

Jim Rodgers said something quite simple but that sums up the situation very neatly. He said that in a recession assets go from the weak to the strong or from the incompetent to the competent. However, The US government continues to take money from the competent to prop up the incompetent.

Citi's management has largely been chopped, it's the board in Citi's case that needs to go. Robert Rubin being at the centre of it. I don;lt think Pandit is especially stupid. Not that he has done well, but he walked into a pretty shitty situation to being with. As Buffet says:

When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.