It certainly looks like the Wall Street bailout has just entered into a new phase of ugliness for the Obama administration. No less than
four nightmare stories--all of them substantive, inherently problematic and concerning Citigroup, and each one more severe than the previous story--have entered into Wednesday's news cycle.
Between these four stories (noted below, and all appearing for the first time in the past 24 hours--I posted a diary early last night on the first two pieces, but the second two stories, appearing in just the past six hours, significantly increase the severity of this matter, IMHO), there's an EASY $25-$30 billion in hidden, additional taxpayer giveaways to Citi already documented as being water under that proverbial bridge. But, conceivably, this amount could go much higher.
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BAD
Tuesday morning, this appeared on Bloomberg, telling us that Citi CEO Vikram Pandit has a "...$617 billion reason to worry." That's the amount of money his Citi Holdings subsidiary has tied-up in "...unprofitable businesses, troubled loans and securities." With up to a year still left for Pandit to formally disengage Citi from the TARP bailout, that's 617 billion ways to fail.
Then again, with an anticipated, additional 10% downside in the housing market still in the offing, up to 48% of the homeowning public projected to be underwater (owing more on their homes than they're worth according to independent projections by Barclays and Deutschebank) by December 2010, an already-commencing commerical real estate crash, and unemployment anticipated to be around 10%-11%, Citi may have bigger dragons to slay than just $617 billion in shaky assets, if it wants to see next Christmas with its corporate ass still intact.
On the other hand, with various government guarantees and backstops still in place in socialized-losses-and-privatized-profits' land (a/k/a the good ole' U.S. of A.), CEO Bandit's probably saying: "Who, me worry?"
As we all now know, losses are for the little people, right?
"Citigroup's Exit From Bailout Clouded by Citi Holdings Assets"
By Michael J. Moore and Bradley Keoun
Dec. 15 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit, emerging from a U.S. bailout with higher capital levels and loan-loss reserves than any peer, still has a $617 billion reason to worry.
That's the amount of assets left in Citi Holdings, the division that Pandit set up to strip his bank of unprofitable businesses, troubled loans and securities. While the bank has unloaded almost $100 billion of the assets so far, getting stuck with the rest may hinder earnings for years, analysts said.
"I wouldn't say that all of their issues are completely behind them," said Bill Tanona, an analyst at Collins Stewart Inc. in New York who rates Citigroup "hold." "We still have a soft economic environment and high unemployment, so losses are likely moving higher in the short term."
Citigroup yesterday joined Bank of America Corp. in exiting a taxpayer bailout program. Both lenders received "exceptional financial assistance," according to Treasury Secretary Timothy Geithner. Citigroup plans to raise capital and repay $20 billion of U.S. funds as the government unwinds a stake in the bank. Wells Fargo & Co., which wasn't in the special category, said yesterday it will raise money to repay a $25 billion bailout...
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BADDER
Then, late Tuesday afternoon, this reared its head, as posted by noted finance blogger Bruce Krasting, over at Zero Hedge. Now, some would argue that it's just a simple matter of selling stock to cover $25 billion in payments to the guv'ment. Funny thing, that taxpayer math!
Here's some more taxpayer math:
1.) Government initially obtains $25 billion in preferred Citi shares.
2.) Government, shortly thereafter, swaps out $25 billion in preferred shares for $10 billion in common stock, because....drumroll....they didn't want to make it appear that they had nationalized the bank. (So, taxpayers took a $15 billion haircut, at the time.) Yes, apparently, Timmy "negotiated" this for us.
To, supposedly, retire the TARP obligation...
3.) Taxpayers (the U.S. gov't) will now receive 6+ billion shares of Citi stock (not cash). And...
4.) $5.3 billion in "Trust-Preferred Securities" (more stock)...
5.) The bank will also attempt to sell another $20 billion of newly-issued stock to the public.
So, (again) supposedly, the government and Citi (combined) will be attempting to offload somewhere in the neighborhood of $40 billion in Citi stock during the next few months.
...to retire the $45 billion TARP obligation. Do the math. (That's a trick statement.)
Needless to say, the odds of this coming out in the taxpayer's benefit--with the markets being flooded with Citi stock for the foreseeable future--are...next to nil. (Then again, we were down $15 billion almost at the get-go--see "2," above.)
And, you thought--based upon those news stories from the past couple of days--Citi was just going to hand over a pile of cash to Uncle Sam, right? Heh. From Krasting...
"CITI's Out of TARP!! - Not...."
Bruce Krasting
December 15, 2009 4:49PM EST
...The dollar value of the "remaining equity stake" is $25 billion. There is no certainty that this amount can be paid back in the "6-12" months indicated in the prospectus.
Citi is not out of TARP. Those headlines were wrong. They will be out of TARP when they have repaid all of what is owed. If Citi receives the benefits of `being out of TARP' before it is actually out of TARP the process will have been subverted.
A question: Were there others (like me) who misunderstood the recent announcements regarding Citi's changing status?
And, here's the smoking gun on Krasting's story: a page from Citigroup's own red herring on the deal, which indicates they may not payoff their TARP bill for up to another year.
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BADDEST
Then, very early this morning, this showed up in the Bloomberg headlines: "Citigroup Says Abu Dhabi Seeks to End Share Purchase."
Citigroup Says Abu Dhabi Seeks to End Share Purchase
By Dakin Campbell
Dec. 16 (Bloomberg) -- Citigroup Inc. said the Abu Dhabi Investment Authority is seeking to end an agreement to buy the bank's stock for more than 8 times its current price, or to receive more than $4 billion in damages if the deal is upheld.
Abu Dhabi Investment, one of the world's top two sovereign wealth funds, filed a claim alleging "fraudulent misrepresentations" tied to its agreement to buy $7.5 billion of common stock, Citigroup said yesterday in a statement. The claims have no merit, Citigroup said. Abu Dhabi Investment would buy the shares for $31.83 to $37.24 apiece, under the agreement.
The New York-based bank announced this week that it would sell common shares to help repay $20 billion in bailout funds to the U.S. government.
--SNIP--
Abu Dhabi Investment purchased Citigroup equity units in November 2007, the bank said. The units require Citigroup to remarket junior-ranking debt securities, then proceeds would be used to buy Citigroup common stock in four equal installments starting next March, according to a 2007 statement.
Citi is claiming that the folks in Abu Dhabi don't have a case. However, as we learned all the way back in December 2007 from lawyer Sean Olender, in his milestone of a piece, "Mortgage Meltdown," in the San Francisco chronicle (I believe Olender coined the term, although I could be wrong), if an entity knowingly sold securities that they knew were flawed to another party, and the other party's able to prove that the seller was aware of the securities' flaws, then the seller is required by U.S. law to reimburse the buyer for 100% of the face value of the securities in question.
(This is common, everyday securities law, btw.)
In November 2007, when Citi negotiated its deal with Abu Dhabi, they were aware of the imminent problems within their own portfolios. I'd tell you to trust me on this, but all you have to do is read this huge and powerful story by the New York Times' Gretchen Morgenson, "[http://www.nytimes.com/...
Geithner, Member and Overseer of Finance Club]," from late April of this year, to get a clear picture as to what I'm talking about.
Cutting to the chase here, what this means is that a $7.5 billion inflow, currently on Citi's books, may have to be massively adjusted, and not in Citi's favor, too. So, whom do you think'll be picking up the tab on this shortfall? (You have three guesses, and the first two don't count.)
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REALLY, REALLY, REALLY FREAKIN' BADDER THAN BADDEST
And, when everyone wakes up in our nation's capital to the WaPo this morning, they'll see this lede: "U.S. gave up billions in tax money in deal for Citigroup's bailout repayment."
U.S. gave up billions in tax money in deal for Citigroup's bailout repayment
Deal made to recover bailout Firms exempted from rule when U.S. sells its stake
Citigroup says it has built up $38 billion in losses. With the tax exemption, it will be able to shelter up to $38 billion in future profits.
By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, December 16, 2009
The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks (Diarist's Note: the previous version of this story had stated: "...$38 billion worth of tax breaks...") that otherwise would decline in value when the government sells its stake to private investors.
While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
Ya' think? (We're already down $15 billion from the original transactions, earlier this year!
"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."
--SNIP--
Officials also said the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time.
Bold type is diarist's emphasis
Who's calling the shots here, again? Are we being told, if "we didn't give the banks the money, they wouldn't be able to repay us with the money that we're, just now, giving them?!?
A senior Republican staffer also questioned the government's rationale. "You're manipulating tax rules so that the market value of the stock is higher than it would be under current law," said the aide, speaking on the condition of anonymity. "It inflates the returns that they're showing from TARP and that looks good for them."
--SNIP--
This urgency has come despite the lingering concerns of many financial experts about the companies' health. These analysts said they worry that the firms could face rising losses next year as high unemployment and economic weakness continue to drive great numbers of borrowers into default.
"They are rolling the dice big time," said Christopher Whalen, a financial analyst with Institutional Risk Analytics. "My fear is that the banks will definitely have to raise a lot more capital next year. The question is from whom and on what terms."
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Lastly, above and beyond these four Citigroup stories over the past 24 hours, Charlie Gasparino has the inside scoop (h/t to Yves over at Naked Capitalism) with regard to what happened at the bankster meeting at the White House on Monday...and, it's not so great: "The Two Faces of Obama."
Yes, White House spinmeisters advertised the gathering as a chance for Obama to channel the public's disgust over Wall Street's celebrating while Main Street still suffers 10 percent unemployment, thanks largely to Wall Street's bungling. But that's not what he did.
Obama started off with the obvious, reminding bankers that the bailout of insurance giant AIG benefited them because it meant they could actually collect on the AIG insurance policies (credit-default swaps) on their risky bond-market bets. But he also seemed to concede their dubious claim that some of them probably would've survived an AIG collapse, given all the other billions the government threw at them during the crisis.
After that, people with first-hand knowledge of the sitdown said, it was a heavily scripted affair -- with none of the fireworks Obama displays in public.
Indeed, the White House last week sent the CEOs the president's talking points: bonuses (too high), lending (more loans to small businesses), the need for more regulation of the financial business (support the bill now before Congress), etc.
--SNIP--
Said one CEO who attended: "I expected to be taken to the woodshed, but the tone was quite the opposite."
Said another senior exec with knowledge of the meeting: "The whole thing was so telegraphed that not much was accomplished, other than giving Obama a PR stunt . . . He might have sounded mean on `60 Minutes,' but during the meeting he was a hell of a lot nicer."
Putting this in perspective, this "hidden," additional bailout for just Citigroup, alone, is equal to around 1/2 of the actual job creation funds (excluding the tax cuts and unemployment benefits) in the new jobs bill! When you consider how much more money was hidden in the bailouts (see bolded references to similar stories) for other major banks, to date, this story becomes even more mind-numbing.
As you may have begun to surmise, this Citigroup story's just chock full of FAIL, not to mention cannon fodder and media creative for the other side...and we're only a day or two into the deal.
Obviously, the recap on the White House meeting just adds insult to injury, IMHO.
This is NOT good. I can't believe I'm actually going to ask this, but: Do the folks at the White House understand how politically damaging these stories are?