Citi will carve out $300-billion in troubled assets, which will remain on its balance sheet:
The first $37-$40-billion in losses on those assets will go to Citi
The next $5-billion in losses will hit Treasury
The next $10-billion in losses will go to the FDIC
Any more losses will go to the Fed
There will be no management changes at Citi, because, you know, they are all fine and upstanding people who have done nothing wrong.
There will be some compensation limitations, but those have not yet been made clear.
To be clear, this is not a “bad bank” model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers.
Citi shovels a steaming pile of $306 billion of crap assets into a corner of its balance sheet. It gradually writes down their value. Citi takes the first $29 billion of losses, and taxpayers take the next 90% (about $250 billion). In exchange, taxpayers get $27 billion of Citi preferred stock.
Would Warren Buffett have made that deal? No way.
At the very least, there should be a sliding scale for taxpayer ownership: The more the value of the crap assets deteriorates, the more of the company the taxpayers own (and the government should be assessing the value of these assets, not Citigroup). Because as it is, Citi has an incentive to write the whole pile off tomorrow for a song. (This would actually be good for the economy, but not for the taxpayer’s “investment”).
By the way, there is no guarantee that this taxpayer largesse will save Citigroup. $306 billion of assets sounds like a lot, but it’s only about 15% of Citi’s massive asset pile (10% if you count the stuff that was so hideous that Citi shoveled it off the balance sheet long ago). Presumably Citi could keep having to take writedowns on assets outside of the bailout’s $306 billion, weakening the company’s capital and eventually possibly forcing yet another bailout.
So taxpayers may get yet another chance to get hosed.
In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren’t reflected there… Among the off-balance-sheet assets are $667 billion in mortgage-related securities.
So there’s many more toxic assets still to be owned up to (read Felix Salmon’s take). Meanwhile, the Economist points out the obvious:
One thing that we know will be fun is watching Mr Paulson defend the purchase of $100 billion of Citi’s junk, while simultaneously arguing that Detroit shouldn’t get a dime from TARP.
Update III: Shareholders like the deal – initially at least. Commentators from left and right think the US government got ripped off: 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. Amazing how much damage the lame ducks can do in the time remaining.
The one sector that definitely needs to contract is the financial sector. Maintaining Citi as a zombie bank is not really constructive. I would feel better if it were carved up, with the viable pieces sold to other firms and the remainder wound down by government. In my view, getting the financial sector down to the right size ought to be done sooner, rather than later.
My questions: (i) How long before another bank wants the same kind of deal? (ii) Is there anything Paulson can now do to rescue his credibility? (iii) How long before the scale of Citi’s problems are fully understood?
Some answers/guesses: (i) Two weeks. (ii) No – he’s changed direction too many times. (iii) Between 2 and 5 years.
There are no quick or easy fixes to this crisis, which has been many years in the making, and it’s likely to get worse before it gets better. But January 20th is our chance to begin anew – with a new direction, new ideas, and new reforms that will create jobs and fuel long-term economic growth.
I have already directed my economic team to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011 – a plan big enough to meet the challenges we face that I intend to sign soon after taking office. We’ll be working out the details in the weeks ahead, but it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy. We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.
These aren’t just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long. And they represent an early down payment on the type of reform my Administration will bring to Washington – a government that spends wisely, focuses on what works, and puts the public interest ahead of the same special interests that have come to dominate our politics.
I know that passing this plan won’t be easy. I will need and seek support from Republicans and Democrats, and I’ll be welcome to ideas and suggestions from both sides of the aisle.
We may well see another dramatic weekend as the banking meltdown continues. It’s just a week since I wondered whether Citigroup might be the next bank to fail. It’s share price (already shredded) has halved again since then.
Now it seems on the verge of testing the nostrum that it’s ‘too big to rescue’. Felix Salmon wonders about a Goldman-Citi hookup, but thinks that nationalisation is the more likely option:
A Citi-Goldman merger would give Citigroup much more credible management, assuming that the Goldman guys took over most of the top jobs, and would give Goldman a much-needed deposit base, not to mention huge distribution capacity through Smith Barney. An enormous number of Citigroup investment bankers would surely lose their jobs, but that is probably going to happen anyway. Meanwhile, Goldman’s investment bankers would suddenly see their deal pipeline fill up with the job of selling off all the bits of Citi they had no interest in keeping.
Possibly more likely is the idea that Citigroup will be nationalized this weekend, with shareholders being wiped out. John Hempton today sketches out what might happen if bondholders got wiped out at the same time; I’m reasonably confident that in the wake of the Lehman debacle there’s no way that Hank Paulson would let that happen.
In any case, with Citi shares trading at less than $4 apiece, somethingneeds to be done. That’s one of the problems with having a public listing: everybody can see when you’re in distress, even if you stop displaying the stock price on the screens in your offices. The market is essentiallly forcing the board’s hand here — not to mention that of policymakers. Citi’s managed to muddle through this week. But my guess is that there will be some kind of major announcement over the weekend.
Update: Somali pirates in discussions to acquire Citigroup…
Update II: Cue inspirational music: “Ambitions never sleep. Aspirations never sleep. Goals never sleep. Hopes never sleep. Opportunities never sleep. The world never sleeps. That’s why we work around the world. That’s why we work around the clock. To turn dreams in realities. That’s why Citi never sleeps.” Insert your own snark here.
The US National Intelligence Council – which supports the Director of National Intelligence and is the centre for long-range analysis in the US intelligence community – has just published a major report on global trends to 2025 (pdf).
The timing’s no accident: the report was deliberately scheduled to emerge after the election but before the inauguration, in order to set out a bipartisan, big picture view of the global context for the incoming President, and to be at the top of the in-tray of his National Security Advisor. In keeping with the increasingly open stance of the Office of the DNI (see David’s post on the DNI Open Source Conference, which he attended in DC earlier this year), the NIC report has been based on intensive engagement with external stakeholders around the world, including two Chatham House seminars.
Although most UK coverage focuses on the report’s key message of the ‘sun setting on US power’ (almost identical headlines in the Guardian and the Times), the other standout story here is the prominence given to scarcity issues. Energy, food and water constraints, together with climate change, are all mentioned in the very first paragraph of the report’s executive summary; by contrast, you need to search through the next four pages of the report before you’ll find any mention of the word ‘terrorism’.
It’s a sobering analysis – and one that poses the question of whether US and international policymaking systems are up to the job. David and I have an analysis piece in the Guardian this morning arguing that the answer to that is a resounding No.
