When I was a kid and I did something stupid (yes…that was known to happen) my dad would ask me “if everyone was jumping off a bridge would you do it too?” There is a long list of financial firms that could have benefited from that rhetorical line of questioning over the last few years. Maybe there is a spot on Citigroup’s board for my dad. If I know him I bet he’d ground them getting in this much trouble.
Citigroup has become the latest bail-out benefactor. The US Government has given them $20 Billion in capital and has committed to $306 Billion of guarantees to backstop their troubled investments. As part of the deal, Citi is issuing $27 Billion worth of preferred shares to Uncle Sam with an 8.00% dividend. The Government also gets warrants enabling it to buy 254 million shares of Citi at a strike price of $10.61 which in theory should allow the tax payer to profit if the plan works. Payment of dividends is limited to 1 cent/share over the next three years, a significant reduction from recent dividend levels. Regulators were concerned that depositors may begin a run on the $2 Trillion institution and upset the “stability” of the financial system. We’re now to the point where it would be more surprising if someone DIDN’T get rescued than if they did.
The asset guarantee portion of the agreement has Citi soaking up the first $29 Billion worth of losses on the troubled assets, after which the government takes 90% of the losses and Citi takes the remaining 10%. Unlike some of the other bailouts…nobody at Citi is required to lose their job. Nobody at the TOP that is..Citi announced last week that they’d be firing 52,000 people…THOSE people will lose their jobs…but the Treasury plan replaces nobody in senior management.
Here is a look at what Citigroup shareholders have had to look at over the last few months:
In addition to covering losses at Citigroup, the Treasury said they would cover anyone who lost money on the Philadelphia Eagles yesterday. They cited the fact that the market mechanism for the Eagles winning the game had broken down (Donovan McNabb went 8 for 18 with two interceptions and a fumble) and that they had to step in to keep the $500 million gambling market from collapsing. If people lost money on the game then the short term pool of liquidity that funds gambling operations across the country might shrink drastically and we can’t have that. Additionally the Treasury is considering guaranteeing credit card purchases of Christmas, Hanukah, Kwanza, and New Years gifts made between today and January second, as well as guaranteeing purchases of any big ticket electronics items made with Home Equity withdrawals over the same time period.
Fed Funds futures continue to price in a 100% chance of a 50 bps cut at the 12/16/08 meeting.
Despite being a short holiday week we actually have a pretty full calendar of economic data. Below is a list of what’s on tap. These releases will be watched with great interest as we move into December.
If you have any questions or if there is anything I can be doing for you just let me know.
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