November 24, 2008
New Orleans We now finally know how to put a name on a bank that is classified as “too big to fail.” Rather than calling it Citibank or Citi, we can now name it Fedibank or just Fedi which will fit in nicely with the other government banks out there with “f” names like Freddie and Fannie. Over the weekend an 11th hour deal was made for the feds to rescue Citi essentially from the markets. This free enterprise thing is great. The invisible hand simply slips into the government pocket when these so-called efficient and rational markets kick the biggest and baddest capitalist institutions in the butt.
Reading the Journal and the Times, I was able to piece the deal together to understand the following elements (and it was interesting how much more the Times told than the Journal, since they had to know the same details).
* Citi and the Feds identified $306 Billion in troubled (also called toxic) assets
* Out of the almost $2 Trillion on the balance sheet and another $1.23 trillion in off balance sheet entities, that would mean something less than 10% of the total bank assets were “troubled,” many of them in mortgage securities.
* Citi will absorb the first $29 Billion in losses directly to the balance sheet.
* The Feds will give $20 Billion in new capital to Citi in the form of a purchase of $20 Billion in preferred stock which they will hold and on which they will receive 8% interest.
* The Feds will also be given another $7 Billion in preferred stock. [To me this looks like the magic of accounting where Citi is saying it will shoulder losses but getting almost the same in capital even before experiencing the losses on its books.]
* Losses after the first $29 Billion will be covered 10% by Citi and 90% by the feds up to the $306 Billion (or as we have seen now with AIG perhaps more).
* Remember that there is $25 Billion in capital that Citi has already gotten from the Treasury Asset Rescue Program (these are green TARPs rather than the blue ones from Katrina, but there are similarities it seems to me).
What do the biscuit cookers get?
* No dividends to stockholders for the next 3 years.
* No excessive executive compensation.
* FDIC homeowner protection plan will be installed, which is not much different than what Citi announced last week.
This saving the worlds’ financial system is hard work, god knows. Reading this short synopsis and realizing the new stake and responsibility that I have now that I own as a American citizen a big piece of Fedibank just takes my breath away for sure.