Monday, November 24, 2008

Citigroup Bailout: Where is the Outrage?

The government's bailout for Citigroup announced this morning was more extensive than the stories last night suggested, with the taxpayers now on the hook of tens of billions of potential losses and the shareholders getting the shaft too.  It is clear now that Citigroup was near collapse, notwithstanding its protestations of financial health and solvency.

The FDIC is involved in the bailout which says a lot. While the stock market may rally today on this news, it only highlights to me the lack of competence at our major financial institutions and their total lack of credibility.  I seriously doubt that I will ever trust anything said in the future by senior management at any major American financial institution and will certainly not invest money in any of them.  (I will hold my Bank of America shares until I come close to breaking even on them)  If the banks can blow up this easily, destroying a decade of appreciation in their stocks, in pursuit of greed by a few senior managers striving for ever larger bonuses and compensation, then it just becomes way too difficult for an individual investor to figure out.  The only thing that can be said with confidence is that none of them are suitable as a long term investment by an individual, but the stocks of these large financial institutions are at best a temporary investments  for traders.  You know, I never invested in AIG but I always tried to keep informed about its business.  But no matter how much I read, I did not know about the reckless actions of a small unit in London that was underwriting credit default swaps and the overall lack of risk control over that unit. 

In this latest bailout, the government will guarantee up to 306 billion in Citi assets.  This needs to sink in some.  Citi would absorb up to 29 billion in losses in addition to pre-existing reserves from those assets. After that, the U.S. would absorb 90% of the losses and Citi would be assigned 10%. The government's share of the losses would be absorbed by the Tarp fund and by the FDIC.  Citi will issue 7 billion in preferred stock to the government, divided between TARP and the FDIC, which will pay 8% (for what is apparently a loss guarantee on the 306 billion in crap).  Citi will receive yet another 20 billion from TARP for preferred shares yielding 8% on top of the 25 billion already received that bought preferred shares yielding 5%.    Yahoo! FinanceNYTimes.comThe common shareholders can not receive more than $.01 a share per quarter in dividends for the next 3 years. The government will also receive warrants to purchase common stock at the strike price of $10.61 exercisable within 10 years.  Citi keeps the income from the assets guaranteed by the government.   This deal is better for the common shareholders than what would have happened to them with no deal.   Now, I do not wish to belabor the point, but what about the few people responsible for buying the crap that brought Citi down?  Are they going to have to pay back a nickel of their compensation, well into millions of dollars per year, that was generated by taking extreme risks with leverage and why would the Board of Directors stay in place that authorized this  activity?  With these kind of deals for the titans of finance, it will be difficult for the next Democrat Congress and the Beanpole to resist the entreaties of the automakers for money.  While I certainly believe they are not worthy, I would have to say that the UAW and the American auto companies are at least more deserving of help than the titans of finance who always find a way to land on the feet with hundreds of millions of dollars no matter how much havoc they cause to everyone else. 

Where is the outrage?  This goes way beyond disgusting.  At a minimum, I would hope that every individual shareholder would at least vote against the Board members for however long they remain.

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