Citigroup Sets The Bar Higher For The Next Round

Ok, this is something of a blockbuster. Here's the latest from the WSJ:

The federal government agreed Sunday to take unprecedented steps to stabilize Citigroup Inc. by moving to guarantee close to $300 billion in troubled assets weighing on the bank's books, according to people familiar with details of the plan.

Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. Treasury officials will charge a higher interest rate for the capital injection -- 8% for the first few years -- than it has charged to dozens of other banks now borrowing money under the government's the $700 billion rescue package approved by Congress last month.

In addition to the capital, Citigroup will have an extremely unusual arrangement in which the government agrees to backstop a roughly $300 billion pool of its assets, containing mortgage-backed securities among other things. Citigroup must absorb the first $37 billion to $40 billion in losses from these assets. If losses extend beyond that level, Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed.

Citigroup would also agree to work to modify -- if possible -- troubled mortgages held in the $300 billion pool, using standards created by the FDIC after the collapse of IndyMac Bank.

The government is not expected to require any management changes, as that was seen as potentially being too destabilizing.

Let's parse this.

The government agrees to go on the hook for another $300 billion. Out-of-pocket is $20 billion that goes to shore up Citi's capital without as so far reported any equity for the government. Citi takes the first loss on the guarantee of assets in an amount of $37 billion to $40 billion (don't you like the way we throw around a billion dollars or so?) and then various parts of the government pick up the rest with the Fed eating the lion's share. Citi gets charged a modestly higher rate of interest, but nowhere market, for the new capital and the government doesn't demand any management changes for fear of destabilizing...what? Oh, and by the way, Citi is genuflecting at the altar of mortgage modifications.

Here's what we don't know. What assets are we guaranteeing and how does that guarantee kick in and require real money? Why is there a $3 billion gap in what Citi has to absorb as a loss? Why the fig leaf of parcelling the losses out among various parts of the government and why is the Fed involved at all in the loss sharing arrangement? And finally, why do the people that negotiated this think that changing management could possibly be anymore destabilising than the current situation.

This is lunacy. Just take the bitch over (excuse the language) and be done with it. Investment bankers erecting incredibly complex financial castles on sand are to a large part to blame for this situation and now they seem intent on transferring that skill to the public sector. This is nothing more than an artifice designed to camouflage a failed bank.

Tom Lindmark