Citi (C) Bailout: Once Again, Taxpayers Hosed

Cut through the mind-numbing details of the Citigroup (C) bailout, and this is what you get:

Taxpayers are getting $250 billion of potential losses in exchange for $27 billion of Citi preferred stock.*


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.

(Citi gets to keep 100% of the interest on these assets, of course, and should they actually recover in value, Citi gets to keep 100% of the gain.)

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.

*Oh, yes, taxpayers will also get up to $2.7 billion-worth of warrants, which will enable taxpayers to buy some Citigroup common stock. But get this: The warrants are priced at $10.61, nearly 3-times Friday’s closing level.

Also, it is not yet clear exactly what value Citi and the government will assign to these assets before the taxpayer guarantee goes into effect. (There will apparently be some negotiation on this point). We can’t imagine Citi will allow the starting value will be much below the $306 billion, though, because any losses taken before the deal starts will come right out of Citi’s pocket. Also, there must have been some negotiation of this point before the $7 billion guarantee price tag was settled on.  In any event, if the assets are written down significantly before they are “ring fenced,” the taxpayer’s exposure could be considerably less.  But a sliding scale of ownership would still have been the fairer way to go.)

See Also: Citi Bailout: The Mind-Numbing Details

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