Citigroup - turning dreams into ...er ... nightmares ?

The dealings of Governments with their pals and relations in the banking industry becomes more Alice in Wonderland every day, making it almost impossible to either keep up with announcements (never mind pre-announcements, hints, nudges, winks, tips, leaks, kite flying, and even lying) or to even hazard a guess at what the hell is happening.

Today Wall Street woke up to find that the US Cavalry (AKA the Federal Reserve, Treasury Department and FDIC ) had "rescued" Citigroup late Sunday night .. after the Fed, FDIC and Treasury identified a massive US$306B in troubled assets. (Citigroup Press release)

Citigroup will absorb the first US$29B in losses on their balance sheet (as if that matters) meanwhile, while the Cavalry will take on the majority of any further losses. Just to add a note of reality the Market capitalization today is just around US$20 Bn.

Citigroup will also receive a further US$20B capital injection from the Treasury in addition to the TARP $25B (@ 5%) it has already received as part of the broader banking bailout.

This will be done by the Treasury / Government receiving US$7B of preferred stock with an 8% dividend, (strike price will be equal to US$10.61 per share (the 20 day trailing average ending on November 21, 2008 although Citi shares closed at US$3.77 Friday).

So Citi have to pay out US$3.4 billion a year in interest payments to the government alone, (TARP + these new bonds) before shareholders see any profit at all.

A 4 page pdf issued by the Treasury , hastily cobbled together over the weekend provides further and better particulars of this extraordinary bond issue, which includes a restriction on the payment of common stock dividends - "prohibited from paying common stock dividends, in excess of US $.01 per share per quarter, for 3 years without UST consent". This also incorporates an ... "An executive compensation plan, including bonuses, that rewards longterm performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG".

Even with this huge US$306B portfolio dealt with (of which no details are available) , many think that as Citi holds over US$ 3Trillion in assets (well, what passes for assets in banking parlours these days) there will be more bad news to leak out.

For example the WSJ today says ...

In addition to US$2 trillion in assets Citigroup has on its balance sheet, it has another US$1.23 trillion in entities that aren't reflected there. ..... Despite the unprecedented scope of the rescue plan, it's not clear whether it will be enough to stabilize Citigroup. The roughly US$300 billion pool of assets that are included in the rescue plan represent only a sliver of the company's more than $3 trillion in assets, including its holdings in off-balance-sheet entities...Among the off-balance-sheet assets are US$667 billion in mortgage-related securities.

Don't forget you shareholders who face a lean time , for a long time ... the guys who got you into this place are still in their place....



George Denis Patrick Carlin May 12, 1937 – June 22, 2008 RIP

UPDATE : 1600 GMT Citigroup opened at US$ 6.12 and at 11.10 ET were US$ 6.03 +2.26 (up 59.95%) Nov 24