*UPDATE: The government is now second-guessing this plan, Charlie Gasparino says. They are worried about a stampede as every other bank in the country demands to unload its trash assets, too. Gasparino:
Sources with knowledge of the deal say government officials are now getting cold feet over the plan to buy the troubled assets from Citigroup.
Situation is still fluid and people close to the company say some sort of a deal will likely be worked out tonight. one other option being considered now is for the government to put money into citigroup.
The problem with buying the assets from citi is political: people close to the deal know that other firms will line up and ask the government to purchase their troubled assets as well knowing that all brokerage stocks got crushed when treasury secretary hank paulson reversed his plan on the tarp to direct capital infusions to the banks and away from buying troubled assets.
EARLIER: The government may save Citigroup (C) by buying $100 billion of crap assets off the company. CNBC, the NYT, and the WSJ are all describing slightly different versions of this type of deal, and the details are still being worked out.
Snapshots of the various reports and our questions/concerns below.
CNBC’s Charlie Gasparino:
The government is looking to buy a substantial amount of assets from
citi, similar to a good bank, bad bank structure. The government would
absorb much of the losses for citi if there are losses and citi would
issue preferred stock to the government. The deal is not finalised but
could be announced tonight.
While government could buy more than $100 billion nominally in the
bad assets if the plans go through, that doesnt mean it will pay citi
$100 billion, depending on the final valuation of those assets. According
to people with knowledge of the discussions between Citigroup and the
government, the plan for Citi resembles the orginal TARP proposal, in
which the government would buy bad assets for financial firms at some
price higher than what’s being offered in the market.
People close to the matter underscore that none of this is a done deal: Other deals, such as the Lehman Brother Good bank / Bad bank proposal blew up at the last minute. Citigroup had no immediate comment. CNBC is still waiting on comment from the Treasury and Federal Reserve.
Reports from Washington say the White House is unaware of any government talks with Citigroup. It also declined comment on whether President Bush would back a government rescue of Citigroup.
The WSJ is reporting a similar “bad bank” deal:
While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a “bad bank.” That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.
The bad bank also might absorb assets from Citigroup’s off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company’s balance sheet. Citigroup also has about $2 trillion in loans, securities and other assets on its balance sheet as of Sept. 30.
Behind the push is a broad effort to shore up faith in the New York company, which saw its stock price tumble by 60% last week to a 16-year low.
Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.
Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to these people, who spoke on the condition that they not be identified because the plan was still under discussion.
If the government should have to take on the bigger losses, it would receive a stake in Citigroup. The banking giant has been brought to its knees by gaping losses on mortgage-related investments.
If approved, the plan could serve as a model for other banks, heralding another shift in the government’s morphing financial rescue. The Treasury Department initially proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions.
The plan for Citigroup was still under discussion on Sunday afternoon, and it was unclear exactly how the arrangement might work. One question is how Citigroup and the government would determine the level of losses that the bank itself must bear before the government steps in. Another is whether any additional government money for Citigroup, which has already received $25 billion under the initial rescue plan, would come from the $700 billion industry bailout that Congress approved in October or from other sources, like the Federal Reserve or the Federal Deposit Insurance Corporation
- Where is this money coming from? The TARP? So is Hank Paulson once again flip-flopping? This will do wonders for his already shattered credibility.
- If the Treasury intentionally overpays for Citi’s crap assets, will taxpayers be compensated for this? We hope so.
- Will common shareholders get wiped out? They deserve to be.
- Will debt-holders get hit? They deserve to be hit, too.
- Will $100 billion be enough? Citi’s balance sheet is $2 trillion. It has more than $540 billion of consumer-related assets alone (credit cards, mortgages, auto loans, student loans…). Will this be another AIG-like situation…a.k.a., a black hole?
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