Reuters compiles six ways that the Feds might bail out Citigroup. It’s hard to see how any of them will save common shareholders:
More preferreds: The US Treasury Department bought $25 billion of preferred shares and warrants from Citigroup in October when it injected capital into banks under the $700 billion Troubled Assets Relief Program. It could buy more, boosting Citigroup’s capital and a renewed government willingness to support the bank, which could soothe investors.
This is probably the most likely scenario. Unfortunately, it will pretty much wipe out the company’s tangible book value (excluding preferred stock), which is what matters to common stockholders. Common stockholders will have yet another $25+ billion sitting on top of them in the capital structure.
Loan or ownership stake: Another possibility is a bailout similar to the original $85 billion package for American International Group Inc. The government made a loan that would be the first to be repaid if the insurer went bankrupt, and took an 80 per cent ownership stake. A more lenient loan for Citigroup plus shares would ensure ample say for the government in how the bank is run, and would leave taxpayers with minimal risk compared to other investors. But such an arrangement would erase much of Treasury’s earlier $25 billion investment in Citigroup preferred shares.
Yes. And it would clobber stockholders.
Liquidation: The Federal Deposit Insurance Corp. could seize the bank. This could shelter the financial system from some of Citigroup’s toxic assets, but at tremendous cost.
Unlikely, in our opinion. The government has enough things to worry about without having to chop up Citigroup and sell off the pieces.
Guarantees: The government could guarantee all of Citigroup’s debt and derivative obligations. This could be a low-cost solution if investor confidence in Citigroup returns.
This won’t stop the additional asset writedowns that are almost sure to come. This is what has really spooked common investors.
Buy the worst assets: The government could buy Citigroup’s worst assets, perhaps at a discount, as the government’s $700 billion rescue package was supposed to do.
A new TARP. That will certainly improve Hank Paulson’s reputation.
Regulatory changes: Instituting a new short-selling ban, loosening mark-to-market accounting rules for bank assets, or halting trading in credit default swaps could provide a temporary boost to banks in general, and Citigroup in particular.
Short of a temporary pop, we don’t think any of these moves will help. The market already doesn’t believe Citigroup’s asset values, so giving them more latitude to make them up won’t instill confidence. Shortsellers, in our opinion, aren’t the problem. We don’t understand why halting trading in CDS’s would do anything (if you do, please explain).
Citi will not be allowed to go bankrupt. In our opinion, it is just a question of what the government does and how this impacts existing shareholders and debtholders.
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