What The Citi Deal Doesn't Do
Citigroup's stunningly complex rescue deal with the federal government buys it enough time to restore confidence, but leaves many issues unresolved.
The company still faces surging credit costs, potential losses from loans on its books and a massive restructuring project aimed at eliminating 53,000 employees by the spring. Its management remains intact even after the government rescue, but it is still unclear what the Citigroup of the future will look like.
Chief Executive Vikram Pandit wants to shed $500 billion of unwanted assets (he's 35% of the way there), exit unprofitable businesses and redirect Citi, all at a time when profits from its mainstay corporate and investment bank are hurting from the softening economy.
Emphasis added by me.
Ever been behind in rent to landlord? Ever bought extra time, hoping you'd come up with the back rent -- but you currently had no way in the world to do that? This is the position of CitiGroup.
The government will buy $20 billion in preferred shares in Citi, nearly doubling its equity investment in the company since October. It is also guaranteeing losses on $306 billion of assets in exchange for a $7 billion fee. Citi has to cut its dividend to 1 cent and will absorb the first $29 billion of losses on the troubled mortgage and other assets, with the government stepping in after that.
The guarantee is believed to cover most of an estimated $314 billion of residential and commercial mortgage loans and securities and some of $9.4 billion in related hedges, according to analysts at CreditSights. Those assets have weighed on Citigroup all year as the credit markets seized up.
But that leaves unguaranteed another $362 billion of credit card and consumer loans and $428 billion in corporate loans, asset-backed securities, derivatives and other assets. "We believe these assets are not guaranteed by the U.S. government for the most part and are not immune to weakness in the overall economy," CreditSights says.
Emphasis added by me.
So we'll wind up eating another third of trillion dollars?
Because no way no how is this going to work.
And still in the shadows, lurkling still unmentioned, is that one trillion dollars of off-the-books stuff CitiGroup is scared to death will come to light.
You think with this, CitiGroup is finished begging at the public trough?
Hardly!
There will be a second round.
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