Sweetheart Deals
I’m prepared to be convinced that some form of assistance for Citigroup was necessary, but this looks like a sweetheart deal to me:
The 11th hour transaction, announced just before midnight on Sunday in the US, calls for Citi to absorb the first $29bn in losses it sustains from its portfolio of risky assets – from residential mortgages to commercial real estate and leveraged loans, collateralised debt obligations and auction rate securities. Federal government entities will stand behind 90 per cent of the remaining losses, which could amount to $249bn. [...]
Under the terms of the arrangement, the US Treasury will invest $20bn in Citi preferred stock under the federal government’s troubled asset relief programme (Tarp) and receive dividends at a rate of 8 per cent annually. On top of that amount, Citi is receiving an additional $7bn in return for preferred shares issued to both the Treasury and the Federal Deposit Insurance Corporation for their roles in guaranteeing the risky assets. [...]
Gary Crittenden, Citi’s chief financial officer, said that last week’s plunge in the bank’s share price, from $9.36 last Monday to $3.77 at Friday’s close, was “very concerning.” At Friday’s share price, the bank’s market capitalisation stood at a mere $20.5bn, according to Bloomberg.
If I understand this correctly, the government just took a company that’s worth $20.5 billion, and gave it $27 billion in exchange for some preferred stock. And then on top of that, we gave them valuable guarantees. Stock is nice, but if we’re handing over to Citigroup more money than the company is worth and taking additional measures on top of that to assist the company, shouldn’t existing shareholders be wiped out? Maybe that’s happening somewhere in the fine print here, but The New York Times says the government’s shares “will pay an 8 percent dividend and will slightly erode the value of shares held by investors.” That sounds like a nice gift for Prince Alwaleed bin Talal of Saudi Arabia and Abu Dhabi’s sovereign wealth fund. Not sure why it serves the interests of American citizens.
UPDATE: Krugman “A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.”
UPDATE II: Tyler Cowen: “Ugh.”
UPDATE III: See also Kevin Drum’s questions at the end.
52 Responses to “Sweetheart Deals”
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November 24th, 2008 at 9:04 am
Jesus. These bastards really are going to keep raping us every single fucking day between now and Jan. 20, aren’t they. Hey Nancy, thanks a whole hell of a lot for taking impeachment off the table.
November 24th, 2008 at 9:07 am
You always want to wipe out shareholders. I agree that this is an awful deal, but in a fair deal, if the government dumped in more money that the company was worth, the existing shareholders should own less than half of the company.
November 24th, 2008 at 9:16 am
The taxpayers should already own 100% of Citi, considering that we’ve shelled out a lot more than its market value.
November 24th, 2008 at 9:19 am
The company’s market cap should rise well over $20.5 billion if the stock price recovers. Focusing just on Friday’s very low figure might be misleading.
November 24th, 2008 at 9:23 am
Forgive the argument by analogy, but all the debates about the bailout plans, going back to the plan for the $700 billion, remind me of the debate on the Iraq war.
A lot of otherwise liberalish people like Thomas Friedman or Peter Beinart supported the war even years after it started, believing that if a lot of conditions were met, it could be a success. Apparently they never thought to wonder whether those conditions were possible in general, let alone whether Bush in particular was likely to meet them. But that should have been obvious from the start. Expecting the party of KBR and PNAC to lead a war like the UNSC was ridiculous before it ever started, and it still is. (Duncan Black posts/posted about this a fair amount.)
And now we have a financial crisis, and something needs to be done about it, so the conventional wisdom goes. Well, that’s probably true, but we don’t get to decide what gets done. Just three years ago, weren’t we all furious at the Democrats for going along with the bankruptcy bill? Do you know why some people call the vice-president-elect “Joe Biden, D-MBNA”?
November 24th, 2008 at 9:27 am
Then again, maybe not. (The current market cap accurately reflects the current net of appropriately discounted assets minus liabilities. When do you suppose all those bad mortgages are going to start to perform? Next month? Riiiight.) But that’s totally irrelevant. If you shovel more money into a company than it’s currently worth, you own it, period- UNLESS you happen to be the unfortunate taxpayers of the good ol’ USA. Such a deal. Moral hazard, anyone? Why yes, I’ll have me a heaping helping, thank you.
Lesson: “too big to fail” SHOULD mean too big NOT to be taken over and broken up.
November 24th, 2008 at 9:36 am
We need to think very, very carefully about whether or not we assist those horribly inefficient U.S. automakers HEY GET THOSE WHEELBARROWS OF CASH TO CITI NO QUESTIONS ASKED STAT!
November 24th, 2008 at 9:41 am
B- b- but- Jim Cramer and Erin Burnett thought it was a great idea on the Today show this morning.
November 24th, 2008 at 9:44 am
To follow up on my last comment, I realize the buck stops with Bush, and this particular decision was made by the Federal Reserve board, not Congress. I’m speaking more generally.
I’m not saying “do nothing”, because this situation is obviously different from the runup to the war. Maybe the actual Congresspeople had no better options than what they actually did, how would I know? As the financial crisis goes on, though, advocates and analysts seem to continually miss chances to be right on something in advance instead of short-sightedly weighing in on just the latest pronouncement.
November 24th, 2008 at 9:57 am
“handout” may be more accurate than “bailout” Who negotiated this thing?
November 24th, 2008 at 10:01 am
1) So, after years of work opposing Bush and working as Democratic volunteers, we progressives received the following from a Democratic Congress:
a) Buttfucked to the tune of $7.4 TRILLION dollars –ON TOP of the $5 Trillion that Bush already ran up –$3 Trillion of which he stole out of our Social Security accounts
b) After letting the Republicans lie for years and bash us as “Tax and Spend” Democrats, Pelosi and Reid are now letting the Republicans and Democratic DONORS steal everything that’s not nailed down. WHO has been running Citibank, by the way?
c) Oh, but we did get a Negro President. Who’s just chosen Hillary to be Secretary of State.
Meanwhile, homeless American citizens are freezing and millions are sick without healthcare.
Nice to know elections and the Democratic Process means something. That must be why we wasted the lives of 4500 US soldiers delivering “Democracy” to Iraq.
November 24th, 2008 at 10:04 am
But , hey, Wayne LaPierre and those fatasses at the NRA still have their guns. Nice to know they are the bulwark of our liberty and prosperity.
Oh, wait…
November 24th, 2008 at 10:15 am
MY: [I]f we’re handing over to Citigroup more money than the company is worth and taking additional measures on top of that to assist the company, shouldn’t existing shareholders be wiped out?
Steve LaBonne: If you shovel more money into a company than it’s currently worth, you own it, period- UNLESS you happen to be the unfortunate taxpayers of the good ol’ USA.
No. What Mario said.
If I have a company that’s worth $20, and you offer to invest $20 in my company, that doesn’t wipe me out. Instead of owning 100% of a company that is worth $20, I now own half of a company that’s worth $40.
This may or may not be a good deal for the taxpayers, but the fact that the deal does not wipe out existing shareholders is not evidence that it’s a bad deal.
November 24th, 2008 at 10:42 am
You’re right, I screwed that up. But we’re not getting 50% either.
November 24th, 2008 at 10:51 am
DTM, you do understand that there is a difference between zombie manufacturing firms and zombie financial firms, don’t you? or don’t you? after all, bankruptcy works so well for financial firms that letting lehman go turned a crisis into an historic crisis….
no, i don’t like it either, but there is a distinction and failure to grasp it isn’t a plus in this environment.
November 24th, 2008 at 10:52 am
Isn’t Citi’s major shareholder a Saudi Prince? Why can’t he bail the company out?
November 24th, 2008 at 11:01 am
This all seems to be a replay. Liberals supporting an absurd bailout then crying foul afterwords.
At least we didnt get suckered into saving the blue collar savages of the midwest, right? I mean, saving Rubin and his friends, who make 500x more than autoworkers, is a “neccesary” move. But they earned it, right? Well, at least there business model is competetive and honest, right?
Oh, wait…
November 24th, 2008 at 11:07 am
Howard, it seems that it is you who don’t understand that we live in a connected economy. That was the lesson of Lehman. The economy isn’t a plug and play video game - oh, we’ll just unplug the entire auto industry. Let’s see what that does! There’s a story in the Times today that the losses to the banks on bonds from the Auto industry will reach 100 billion + - I know, chump change in our new world, but that might even hurt the pockets of some rich people. Ouch. We can’t have rich people feeling any pain! It would make us cry. Then, of course, there’s the little fact that the housing crisis which was at the basis of the credit crisis will just be considerably magnified by the effect of dumping 500,000 people onto the unemployment rolls in a recession, to say nothing of the cascade of bankruptcies of peripheral industries that will follow.
You see? There’s even an argument that the innovative financial service sector could be hurt. My god! That would be so, so terrible! But perhaps we could, to satisfy the libertarian side of the liberal/libertarian alliance we so ardently want to see effected, seeing as they are our new public intellectuals, put a few blue collar children in a cage and starve them to death. Or, I know - that’s too harsh! dress them up as chimney sweeps and set them to work this Christmas season. So dear. And what a great profession for them to go into! It isn’t dreadfully unionized, so that won’t be making those gigantic salaries.
November 24th, 2008 at 11:25 am
@Steve LaBonne: But we’re not getting 50% either.
We are getting preferred stock, which is more like debt than common stock — in a liquidation the taxpayers would get paid before any stockholder got paid. That said, the terms might still be lousy.
November 24th, 2008 at 11:37 am
It looks like Wall Street has a been given a blank check, and with Geithner about to take over from Paulson this will likely continue. Most disturbing is these actions are taken with no public debate, and are the product of the back room Bernanke/Paulson/WallStreet groupthink that got us into this mess in the first place.
November 24th, 2008 at 1:41 pm
Yves Smith at Naked Capitalism has a sharp analysis of the CITI bailout and also has this to say about the financial sector.
“Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults). The particular target for ire is the autoworker pensions and health plans, as well as their work rules. But the pension plans being underwater is the fault of GM management for not providing for them in the fat years; I personally have trouble with the idea that health care should vary by class; and for the work rules, German and Swedish automakers have strong unions and yet can compete. I see the UAW as having correctly seen GM management feeding at the trough and doing a good job at extracting their share.
And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.”
http://www.nakedcapitalism.com/2008/11/finance-has-lost-sight-of-its-role.html
November 24th, 2008 at 5:17 pm
Does anyone else feel like these bailouts are rash and feeble? The government needs a long-term plan, rather than trying to jump-start matters. They need to set a goal and see their idea through successfully!
I think another vital note from this bailout is that we now see the magnitude of this recession. We all should take the necessary steps to recession-proof our lives. In order to do so, I think a realistic estimate of the amount of money we need to cut back on is relevant. Additionally, we all should have a clear vision of our altered future- many people are still living as if we’re in the .com boom of the 90’s! Here’s a great resource I found helpful when reorganizing my future: http://www.thevisionboardkit.com. This kit actually outlines how to create a vision of your goals and dreams and explains how to execute them with success.
November 24th, 2008 at 6:28 pm
The next time I hear bitching about “Those damn liberals” I want a phone number or a address so I can do something physical. Each president has a set of problems they need to deal with. Every President iss judged by how well they handle their set. This President took three years out of eight for vecations. He ripped the top off the cookie jar and invited his fattest friends to come eat all, then more, then mine, then anything that was left shoved into dirty pockets. When all were fat enough, they decided, since there was nothing left, they better gaurd the last few they’d hoarded in their pockets. The rest of us couldn’t get a morsel if we tried. The crumbs that fell on us out of their huge stuffed gobs? That’s trickle down. This set of problems was 100% Republican made. No Obama. No Democrats that went along with it. We all know who did it. We’ll never know why.
If you want to see America regain it’s prestige and good name? You want to see the DOW soar for a couple days?
Indict Bush and Cheney and Rummy and that whole crew and try them in public. Mayb we can get a little credibility back.
November 24th, 2008 at 10:15 pm
my initial thought upon hearing about Citibank’s potential bankrupcy was, Sweet… this will cancel out the small fortune’s worth of debt I have stored up on my trusty Citi-card… right?
November 24th, 2008 at 11:25 pm
Oh my, you have a picture of the Citigroup building in Queens, the tallest building in the outer boroughs.
November 25th, 2008 at 1:42 am
Are we going to get to change the name of the new Mets’ stadium — the one Citicorp is paying $400 MILLION to plaster its logo on — to “Taxpayers’ Stadium” or “I Got Fucked for THIS” Stadium?
November 29th, 2008 at 3:33 am
AFP/File – US bank Citigroup said it would cut up to 50,000 jobs worldwide as the company struggles with the global … NEW YORK (AFP) – A brutal financial crisis showed its teeth on Monday as the banking giant Citigroup
November 29th, 2008 at 4:44 am
NEW YORK (Dow Jones) — In the most dramatic round of layoffs seen to date in the battered U.S. financial sector, Citigroup Inc. said Monday that it plans to cut about 50,000 jobs, representing 20% of its global workforce, in an
December 10th, 2008 at 12:36 pm
The indictment criticizes VP Dick Cheney’s investment in the Vanguard Group, which holds interests in the private prison companies running the federal detention centers. McALLEN, TX — A South Texas grand jury has indicted Vice
December 14th, 2008 at 8:24 am
HOUSTON (Reuters) - A grand jury in South Texas indicted U.S. Vice President Dick Cheney and former attorney General Alberto Gonzales on Tuesday for
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