So how much were those Citigroup assets guaranteed by the taxpayers really worth? The government and Citi kept saying we had put a government guarantee over $306 billion worth of troubled assets, with Citi taking the first $29 billion in losses and 10% of the losses thereafter. Everything else was guaranteed by one or another government agency–the Fed, the Treasury and the FDIC.
But isn’t part of the problem with these troubled assets the fact that they are hard to value? So how do we know that we guaranteed $306 billion. We figured this was the face value of assets. Alternatively, that may have been the figure at which Citi’s accountants had valued the assets. In either case, it seemed likely that there was an automatic (if not necessarily permanent) loss on the assets: whether the $306 billion was face value or some kind of written down value, those assets are almost certainly worth even less than that. We guaranteed they’d be worth $306 billion even though they were already worth something less.
How much less? William Cohan has written at the Daily Beast that his sources believe the market value of those assets is only $230 billion. This $76 billion decline in vallue means that we’ve already burned through all of Citi’s initial $29 billion loss-taking commitment, Citi may have to take an additional $4 billion of write downs and taxpayers are on the hook for $42.3 billion.
Of course, the government and Citi would probably reply that its too early to know these losses. They plan on holding the assets for the long term and are confident that the values will recover. But what on earth is this confidence based on? We’ve never seen a downdraft in housing like this, so its hard to imagine what historical case they’ve built their confidence upon. We suspect that they are simply using the same old models that tell them we’ll eventually ‘revert to the mean’ and prices will come back in line with what they were in the past.
But those are the models that told them we would never have this horrible financial crisis in the first place. In the case of mortgage backed securities, they are built on just a couple of decades of data. They are likely entirely useless.
So it’s entirely possible that the assets at Citi really are worth $230 billion and may be headed even lower.