The government is on the brink of announcing a bailout of Citigroup. Although the discussions are ongoing and the situation remains fluid, the plan under consideration now seems to be a revival of the original TARP idea.
Under this plan, the Treasury would buy so-called toxic assets from Citigroup. The government would pay far more than the current market prices, according to a source familiar with the matter. The rescue would replace assets of doubtful value with cash from the federal government. Crucial to the deal is overpaying: the government would pay far more than the current market values for the assets.
The basic idea would be for the government to cap the losses at Citi. This could be accomplished by having the government buy Citi’s assets with Citi agreeing to take the first tranche of losses, much as JP Morgan agreed to take the first $1 billion of losses on Bear Stearns portfolio.
Here’s the latest from the WSJ:
Under the terms being discussed with top Treasury Department and Federal Reserve officials, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold, people familiar with the matter said. The U.S. government would then absorb any additional losses, these people said. One person said the new entity is expected to hold about $50 billion of assets.
That would mean taxpayers could be on the hook if Citigroup’s massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.
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