Sweetheart Deals


I’m prepared to be convinced that some form of assistance for Citigroup was necessary, but this looks like a sweetheart deal to me:

The 11th hour transaction, announced just before midnight on Sunday in the US, calls for Citi to absorb the first $29bn in losses it sustains from its portfolio of risky assets – from residential mortgages to commercial real estate and leveraged loans, collateralised debt obligations and auction rate securities. Federal government entities will stand behind 90 per cent of the remaining losses, which could amount to $249bn. […]

Under the terms of the arrangement, the US Treasury will invest $20bn in Citi preferred stock under the federal government’s troubled asset relief programme (Tarp) and receive dividends at a rate of 8 per cent annually. On top of that amount, Citi is receiving an additional $7bn in return for preferred shares issued to both the Treasury and the Federal Deposit Insurance Corporation for their roles in guaranteeing the risky assets. […]

Gary Crittenden, Citi’s chief financial officer, said that last week’s plunge in the bank’s share price, from $9.36 last Monday to $3.77 at Friday’s close, was “very concerning.” At Friday’s share price, the bank’s market capitalisation stood at a mere $20.5bn, according to Bloomberg.

If I understand this correctly, the government just took a company that’s worth $20.5 billion, and gave it $27 billion in exchange for some preferred stock. And then on top of that, we gave them valuable guarantees. Stock is nice, but if we’re handing over to Citigroup more money than the company is worth and taking additional measures on top of that to assist the company, shouldn’t existing shareholders be wiped out? Maybe that’s happening somewhere in the fine print here, but The New York Times says the government’s shares “will pay an 8 percent dividend and will slightly erode the value of shares held by investors.” That sounds like a nice gift for Prince Alwaleed bin Talal of Saudi Arabia and Abu Dhabi’s sovereign wealth fund. Not sure why it serves the interests of American citizens.

UPDATE: KrugmanA bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.”

UPDATE II: Tyler Cowen: “Ugh.”

UPDATE III: See also Kevin Drum’s questions at the end.