As someone who donated to the campaign (both in the primary and general) made phone calls for Obama and canvassed out of state I am deeply concerned that the Citicorp bail out reflects the extension of the Kleptocracy of the Bush years rather than the "change we want to believe in". I look forward to hearing from the incoming Obama administration whether
a) the Citicorp bail out reflect the views of the soon to be Obama administration
b) and if so why it was not a lousy deal for the tax payers.
Note this is not a discussion about whether Citicorp should have been bailed out; for the purpose of this diary I am prepared to stipulate that a bailout was necessary. I am questioning whether it was the interests of taxpayers that was paramount or that of investors in Citicorp particularly one very large Saudi investor.
As of September 30th, 2008 the common equity (paid in and retained) of Citicorp was about $99 billion. After the deal the worst that can happen to the common equity (from the toxic assets subject to the bail out)is that it will decline to $36 billion i.e. the starting equity minus the first loss of $29billion minus 10% of future losses ($27billion)minus the $7 billion in preferred equity issued to the tax payers. In other words the tax payers have guaranteed that the equity per common will not decline below approximately $6.70/share. However, for the tax payer to lose money the value of the toxic portfolio only has to decline by approximately $37 billion. Note at that level Citicorp common will still be worth $62 billion or about $11.50 per share. In other words there is a strong possibility that Citicorp shareholders see an appreciating in their stock price while the tax payer is losing money.
I believe that the defenders of this deal (those who are supposed to be protecting the taxpayers) would argue that the likelihood of there being a loss on this portfolio greater than $29 billion is minimal. On an acturial basis the probability of loss of greater than $29 billion is more than compensated by the $7 billion of preferred that Citicorp is paying for the protection. That increasing the first loss that Citicorp would have to adopt would result in a much lower premium being paid for the government insurance. That the loss and premium are caliberated to produce the best result for the tax payer.
My simple response is that there is a simple way to prove their assertion and I challenge them to do it.
The treasury department could structure a financing ($20 billion) under which the investors receive the normal yield on a Treasuy Note but the final principal payment is indexed to the actual cost or profit that the Governemnt derives from its bail out of Citicorp. based on the amounts the Government (Treasury, Federal Reserve and FDIC). If such a security could be issued above par it would be unequivocal confirmation that the Treasury got a good deal; however if it was issued below par (which is the more likely outcome)it would be an equally unequivocal confirmation that Treasury received a less than market return i.e. Citicorp received a tax payer subsidy - the difference between market price and par value.
Besises quieting critics such a financing would also help to establish a price on toxic assets and allow for a more appropriate bdugeting of the costs of the bail outs.