The Treasury Department decided to bailout Citigroup today, as the bank, once the largest in the world, lost over 60% of its value in the last week alone. Under its TARP program, the Treasury will inject about $20 billion into Citi, on top of the hefty $25 billion already handed over to the company.
Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company has operations stretching around the globe in more than 100 countries.
Wait, that’s not all…
As part of the plan, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.
Under the loss-sharing arrangement, Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. Money from the $700 billion bailout and funds from the FDIC would cover the government’s portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.
And what does the tax payer receive in return?
In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup. In addition, Citi said it will issue warrants to the U.S. Treasury and the FDIC for approximately 254 million shares of the company’s common stock at a strike price of $10.61.
How nice! We put $20 billion up front and then we guarentee up to $306 billion (43% of the TARP program) in losses, and what do we get? $7 billion and a $4.7% stake in an ailing company? Not a bad deal….for Citi.