Crisis Diary as it unfolds ….

More on Citi and new avatar of TARP

Some interesting details of Citi bailout and why this is a sweet deal for shareholders.
Via Stefan Karlsson

The Citi bailout comes in the form of a $20 billion capital injection combined with a guarantee that the U.S. government will cover up to $249.3 billion in losses. Formally, the latter is structured as Citigroup taking the first $29 billion in losses from a $306 billion portfolio, with the U.S. government taking 90% of the rest.
In return, the U.S. government gets preferred shares of $20 billion yielding 8%, as well as a warrant to buy Citigroup shares during the next 10 years at a strike price of $10.61 billion.

So what this means to shareholders?
The crude math works this way. Assuming Citi has upto 306B$ in toxic assets,
Book value of each Citi Share as of Sep’08 = 126b$/5.5billion shares = 22$ per share
If all the troubled assets return 0$,
Book value of each Citi Share = 70b$/5.5 billion shares = 13 $ per share

This is much more that current share price price ~ 6.00 and much much more than the share price when gov’t announced the bailout (apprx. 3.5$). The story with FED bailouts so far has been that in every bailout so far equity was completely wiped out, then why no such provision in case of Citi? In worst case scenario, why taxpayers should end up paying 250B$ of citi’s debt still leaving apprx 70B$ in equity untouched? Beats me.

In other news, today FED announced new 800b$ lending program.
Bloomberg reports,

The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

There are two parts to it.
The first 600B$ is nothing but shifting Fannie, Freddie debt on FED balance sheet. They are anyway nationalized and so is their debt. As Paul Krugman points out, it is perhaps really difficult to make sense out of this move.
The second part of it, 200B$ in consumer lending? An attempt to prop consumption spending on borrowed Chinese money? Is it still not sufficiently established that overconsumption on borrowed money is one of the basic problems with US economy? I don’t know, perhaps I am getting something wrong here.

Also, some housing numbers came out today. The slide in housing prices accelerated quarter-over-quarter and housing seem to have resumed its fall in bottomless pit after brief pause last quarter.

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November 25, 2008 - Posted by | News | , ,

1 Comment »

  1. Great comment and analysis. Your question “why no such provision in the case of Citi?” is the heart of the matter in why the market has no confidence. Paulson destroyed billions in assets directly and much more indirectly with his actions on Fannie and Freddie (killing the shareholders and preferreds), Lehman (letting the whole thing blow up), Bear (protecting everyone), etc.

    He single-handedly turned Main Street investing into a crap-shoot! There should be formal class actions suits against such inconsistent and deceptive leadership!

    Comment by guruatmoneyassistant | December 8, 2008


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