Nov. 24 (Bloomberg) -- "Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week."
Although it was an inevitability, we can officially add Citigroup Inc. to the list of failed and bailed corporation.
The government will use $20 billion of the TARP funds to buy preferred stocks. The U.S. (taxpayer) and FDIC will put a guarantee on $306 billion in assets. In exchange for the $306 billion parachute. Citi will incrementally issue $7 billion in preferred stock to the U.S. Treasury.
There is some additional capital released as a result of a lowered risk weighting and other ripple effects that go along with this deal. We also saw a birage of the Federal lending facilities, both new and old, brought to use here. Citi was given expanded access to the Primary Dealer Credit Facility and the discount window. Citi also tapped for the first time the Commercial Paper Funding Facility and it looks like they will be issuing debt under the FDIC's Temporary Liquidity Guarantee Program.
Then there are some interesting issues that we need to note.
Government Marks-to-Magic
For those who haven't realized it yet, we are fully entrenched in financial socialism. The government has reaffirmed their stance that they will not let ANY MORE BANKING INSTITUTIONS FAIL. Combine that with the coming pro-labor policies set by the messiah, I mean president-elect Obama, and all I can say is, welcome to France.
Regardless, this deal also had an interesting twist not seen with Lehman Brothers, Washington Mutual, Wachovia, or Bear Stearns. Citi shareholders were bailed out.
Here's the deal. In changing the rules of the game through lending facilities, bailouts, accounting fraud, short sale bans, etc., the government is removing proper price discovery methods.
The obvious goal in bailing out the shareholders was to instill confidence in other equity holders and potential equity holders in order to bring some buyers back into the stock markets.
The government has also significantly helped in putting a price to these illiquid assets whether it be asset backed paper of credit default swaps. They are telling us that the price of these assets is whatever the government sets it to be. Just like the CDS that are driving these banks into financial oblivion, the government is marking these assets to make believe values.
Valuing the Unvaluable
Put it this way, Citi has a negative asset value. This simply means that if they were to sell all of their assets, they would still owe money. In putting Citi's liabilities on the backs of the taxpayers, by backing the debt and buying a stake, the government has returned Citi's asset value into the green.
The moral of the story is that Citi is not an outlier. All the banks that have been deemed too large to fail have negative asset value. The Treasury and Federal Reserve is simply going to do whatever it takes to prevent these banks from having to sell those assets revealing these banks true colors. Short sellers cannot be blamed for pushing these stocks towards zero, because that's what their worth, unless of course Uncle Sam steps in.
Nicholas Jones
Analyst, Oxbury Research
Disclosure: None
Although it was an inevitability, we can officially add Citigroup Inc. to the list of failed and bailed corporation.
The government will use $20 billion of the TARP funds to buy preferred stocks. The U.S. (taxpayer) and FDIC will put a guarantee on $306 billion in assets. In exchange for the $306 billion parachute. Citi will incrementally issue $7 billion in preferred stock to the U.S. Treasury.
There is some additional capital released as a result of a lowered risk weighting and other ripple effects that go along with this deal. We also saw a birage of the Federal lending facilities, both new and old, brought to use here. Citi was given expanded access to the Primary Dealer Credit Facility and the discount window. Citi also tapped for the first time the Commercial Paper Funding Facility and it looks like they will be issuing debt under the FDIC's Temporary Liquidity Guarantee Program.
Then there are some interesting issues that we need to note.
Government Marks-to-Magic
For those who haven't realized it yet, we are fully entrenched in financial socialism. The government has reaffirmed their stance that they will not let ANY MORE BANKING INSTITUTIONS FAIL. Combine that with the coming pro-labor policies set by the messiah, I mean president-elect Obama, and all I can say is, welcome to France.
Regardless, this deal also had an interesting twist not seen with Lehman Brothers, Washington Mutual, Wachovia, or Bear Stearns. Citi shareholders were bailed out.
Here's the deal. In changing the rules of the game through lending facilities, bailouts, accounting fraud, short sale bans, etc., the government is removing proper price discovery methods.
The obvious goal in bailing out the shareholders was to instill confidence in other equity holders and potential equity holders in order to bring some buyers back into the stock markets.
The government has also significantly helped in putting a price to these illiquid assets whether it be asset backed paper of credit default swaps. They are telling us that the price of these assets is whatever the government sets it to be. Just like the CDS that are driving these banks into financial oblivion, the government is marking these assets to make believe values.
Valuing the Unvaluable
Put it this way, Citi has a negative asset value. This simply means that if they were to sell all of their assets, they would still owe money. In putting Citi's liabilities on the backs of the taxpayers, by backing the debt and buying a stake, the government has returned Citi's asset value into the green.
The moral of the story is that Citi is not an outlier. All the banks that have been deemed too large to fail have negative asset value. The Treasury and Federal Reserve is simply going to do whatever it takes to prevent these banks from having to sell those assets revealing these banks true colors. Short sellers cannot be blamed for pushing these stocks towards zero, because that's what their worth, unless of course Uncle Sam steps in.
Nicholas Jones
Analyst, Oxbury Research
Disclosure: None
