The U.S. taxpayer will now take most losses on a $300 billion package of bad debt Citigroup is holding:
Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.
Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.
In the deal the government will get some likely worthless equity in Citigroup.
The question I don’t see anybody touching is for what percentage of the notional value of the loans this deal was done. The deal terms (pdf) say:
Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).
So who will set those values? Who will supervise those who set these values? There are billions of taxpayer dollars at risk in each percentage difference of these evaluations. Where is the reporting on that?
Instead we are subjected to such nonsense:
Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup’s balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.
Ahem, does the Citigroup official balance sheet matter at all?
In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren’t reflected there. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company’s books.
Citigroup is dead. There is no way the company can survive without a massive default. It will not be the only one. Others are lining up:
Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill
and government officials to restart the asset-purchase program in
recent weeks."The problem is that other banks would want to get in line" for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. "Is there enough money to do that?"
Only if you print it …
And who is pulling the strings behind all this?
Inside Citigroup’s Park Avenue headquarters, the mood was tense. Through the weekend, Robert E. Rubin, the former Treasury secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M. Paulson Jr.
Still hoping for change in the next administration?
It is testament to former Treasury Secretary Robert E. Rubin’s star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.
The president-elect’s choices for his top economic advisers —
Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as
senior White House economics adviser and Peter R. Orszag as budget
director — are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties:
Michael Froman, Mr. Rubin’s chief of staff in the Treasury Department
who followed him to Citigroup, and James P. Rubin, Mr. Rubin’s son.
All three advisers — whom Mr. Obama will officially name on Monday and Tuesday — have been followers
of the economic formula that came to be called Rubinomics: balanced
budgets, free trade and financial deregulation, a combination that was
credited with fueling the prosperity of the 1990s.
The correct version of the last sentence would have been: "a combination that was credited with fueling busts and bailouts of 2008, 2009 and 2010".
With this Citigroup bailout and the prospect of the incoming team of Wall Street gangsters, the chance of a default of the U.S. government on its debt are now higher than ever.