I've seen and heard the Citi bailout described with all of the esoteric govt nomenclature, no doubt included to confuse the casual reader, but this is what it essentially boils down to.1. The government has given Citi an additional $20B on top of the $25B it gave them back in October under the original TARP. This is in the form of preferred equity, meaning that common equity is now VERY diluted.
2. The government has "ringfenced" or essentially backed $306B of bad assets (toxic sub prime mortgages and derivative investments that are REALLY weighing it down). It should be noted that the CEO told hundreds of thousands of Citi employees on Friday (before the deal was announced Sunday) that the bank was in a good position which raises the question of why they're ringfencing 300 billion in assets if they're in such a good position, but I digress. I guess if my stock was nearing zero I could spare a lie or two until someone threw a life preserver.
3. Citi will eat 12% or ~37B of the ringfenced assets and the govt will essentially back the rest at a rate of 90/10 US to Citi. This means that as every remaining dollar of toxic assets is realized the govt will "loan" Citi 90 cents and Citi will cover 10 cents. It should be noted that while it is structured as an "as needed loan", I believe Citi is in pretty deep, so it's really all needed now!
Obviously I don't like it in theory but I realize that these measures, and most likely many more like them need to happen. There was a cabal of 9 major bank CEO's that met with Sec. Paulson back in October to discuss the initial disbursement of TARP funds. While Citi had the greatest exposure to these toxic investments, I would bet donuts to dollars that all of the banks represented in that meeting (it would be irresponsible to name them publicly) are in a similar position. Which means that Tarp 1.0's 700B won't be close enough to get all of these banks even close to solvency. Not to hyperbolize but after considering this $350B+ total just for Citi I think anything less than $3T is wishful thinking at this point....for those who are counting that's at least $2.3T more in addition to Tarp 1.0, at least.
There was a scene in one of the Austin Powers flicks where Dr. Evil has a laser pointed at the U.S. and is negotiating a settlement with the President circa 1960 played by Tim Robbins. Dr. Evil, having traveled back in time to threaten these guys ask for some huge amount like $500B dollars (relative to that time). Robbins and the rest of the cabinet pause and then all crack up in laughter at Dr. Evil, saying "it's 1960, that kind of money hasn't even been invented yet, that's like asking for a gagillion, bagillion dollars."
A gagillion bagillion...who knew?
