Sunday, November 23, 2008

Citigroup, U.S., Contemplate Compost Pile

You know the world is going to hell when financial news resembles something you might see on the Comedy Channel. I see that Citi and the U.S. are considering formation of a compost pile.

I'm not kidding. Citigroup and the U.S. government are in talks to create a "bad bank" to hold toxic crap from Citi's balance sheet. Here's the Wall Street Journal Online article.

Here's an outline of what is under discussion, according to the Journal:
Citigroup Inc. is nearing agreement with U.S. government officials to create a structure that would house some of the financial giant's risky assets, according to people familiar with the situation.

While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank." That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.

The bad bank also might absorb assets from Citigroup's off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company's balance sheet. . . .

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.

Now, what will be demanded of Citi in return for the taxpayers taking all this crud from Citi's balance sheet? Any curbs on compensation and its dividend, now yielding 17%? Any change in management? Any well-deserved pain?

Or does Citi reap this dose of government laxative, in return for stabilizing the financial system it destabilized by buying all this crud, and in return has to sacrifice nothing? Stay tuned.

UPDATE: The "compost pile" discussed in the early report (quoted above) ultimately morphed into a straight-up rescue package. The article linked above now says as follows:

Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies -- the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. -- will take on any additional losses, though Citigroup could have to share a small portion of additional losses.
So instead of the sewage being dumped into an off-balance-sheet compost pile, it will continue to fertilize the Citi balance sheet but Citi will not reap the consequences of all but a small part of its lousy decisions.

Citi's obligations in return for this bailout:

The government didn't require Citigroup to make changes to its executive ranks or its board in return for government assistance. However, Citigroup agreed to "comply with enhanced executive compensation restrictions," the government said Sunday, and also will implement a government-backed plan to modify distressed mortgages that is designed to curb foreclosures.
And this still may not be enough to rescue Citi.

It will be interesting to see to what extent Bob Rubin was involved in crafting this bailout package. His close relationship with Tim Geithner and Larry Summers puts him in tight proximity to both the New York Fed and incoming Treasury Department. CJR's Audit column notes that Rubin's role at Citi is going to be scrutinized.

© 2008 Gary Weiss. All rights reserved.

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