US to Convert Preferred Shares in Citi to Common at 32% Premium to Market Price

Funny how a deal that is giving Citi a premium on its common shares that one typically sees in an M&A transaction (ie, the target is sought after) in the course of a salvage operation is being . Similarly, the bank is being asked to have its board members that are insiders resign those seats. Why isn’t Uncle Sam also asking for all board members to resign? While it cannot compel their resignation, under the circumstances it would be appropriate (and anyone who refused would be subject to unfavorable press attention). Board members are recruited by the CEO, hence sympathetic to its interest. And the government could refuse the resignation of any board members it wanted to keep. Frankly, any Citi board member should be ashamed of his abject failure to oversee the company adequately.

From the Wall Street Journal:

The Treasury has agreed to convert some of its current holdings of preferred Citigroup shares into common stock, a move that could better protect shareholders against future losses.

As a condition, the government is demanding that the New York company overhaul its board of directors. Citigroup’s board will soon include a majority of new independent directors, the company said Friday. Chief Executive Vikram Pandit is expected to keep his job under the agreement…..

While the government isn’t injecting additional taxpayer dollars into Citigroup, the agreement will help the company by boosting a key financial metric known as tangible common equity, which essentially measures what shareholders would have left if the company were liquidated. The government and banks have concluded that beefing up tangible common equity was a key to arresting the downward spiral in financial companies’ shares….

Citigroup will still have to endure the so-called “stress test,” which examines banks’ ability to withstand various chilling economic scenarios, and could be required to raise additional capital.

The company will reconstitute its board to include a majority of new independent directors. It said of the 15 current directors, three will not stand for reelection and two will reach retirement age, and it will announce new directors soon.

Citigroup Chairman Richard Parsons has been scrambling to lure new directors. That has proven an uphill battle, with two candidates Citigroup approached rebuffing the overtures, according to people familiar with the matter.

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64 comments

  1. Hemant

    Think ppl are missing something. They are paying 30% premium on common, but they seem to be reckoning the preferred at par.. I cant imagine citi pref was trading at par.

    So this is actually bailing out GIC Singapore?

  2. Anonymous

    You ask a great question here;

    “Similarly, the bank is being asked to have its board members that are insiders resign those seats/ Why isn’t Uncle Sam also asking for all board members to resign? While it cannot compel their resignation, under the circumstances it would be appropriate (and anyone who refused would be subject to unfavorable press attention). Board members are recruited by the CEO, hence sympathetic to its interest. And the government could refuse the resignation of any board members it wanted to keep. Frankly, any Citi board member should be ashamed of his abject failure to oversee the company adequately.”

    Maybe it has something to do with past “oversight failures” and money laundering problems that may not have been fully corrected and have become submerged more deeply. After all you do need to keep those ‘business relationships’ solid and open;

    Excerpt;

    “US banking giant Citibank has been criticised at a Senate hearing into money laundering in the American banking system.

    A senate-investigative committee said there was no evidence that the bank knowingly helped clients suspected of links to corruption and crime to conceal the true source of funds.

    But it accused the bank of failing to implement procedures which would have weeded out money from illegal sources.

    Commitee chair Senator Susan Collins, a Maine Republican, said: “Too often, Citibank’s private bank essentially paid lip service to its own procedures.

    “Even more troubling, (its officials) continued to do so even in the face of highly critical internal audits and warnings from banking regulators,” she said.

    The hearing follows the release of a 64-page report from the committee, which has been examining for a year the activities of both Citibank’s private banking operation, and private banking in general.

    “We cannot allow the integrity of our banking system to be sullied by the dirty money that fuels the engine of criminal enterprises both here and abroad,” Senator Collins said.

    “Our banks must be vigilant in their efforts to detect and report criminal activity and avoid acting as conduits for money laundering.”

    The report concluded that Citigroup – formed last year from a merger of Citibank and Travelers Group – moved too slowly to correct known problems.”

    Link;

    http://news.bbc.co.uk/1/hi/world/americas/511951.stm

    Deception is the strongest political force on the planet.

    i on the ball patriot

  3. bb

    it’s the management that requires this premium. remember how citi overpaid for old lane? the same guy is running the bank now, so the treasury has to overpay to get his services.

    viki for treasury secretary!

  4. Eyal Bar

    Exactly, the fact that BODs are not ashamed, especially after Enron etc’, shows that we are very very far from the end of the adjustment to society that is needed here.

  5. i like tuesday

    “The government and banks have concluded that beefing up tangible common equity was a key to arresting the downward spiral in financial companies’ shares….”

    Why do we care about Citi’s share price again? They aren’t going to be able to raise private capital any time soon. The only reason the stock price isn’t lower is option value on the government doing this. This is just a bailout of equity holders who should stand first in line to take losses.

    There are solid systemic risks arguments for creditor bailouts but this is egregious.

  6. Martin, the Netherlands

    In understand this is the third episode of the bailout of Citigroup. How many more stages do the readers expect to see, and how much public money to the expect to be involved?

  7. Ryan

    I have a question about the logisitics of how the government would go about “nationalizing” the large banks. From what I understand, the virtue of nationalization would be that the government could transfer the non-performing assets from the banks’ balance sheet to the government’s balance sheet (or some government vehicle) without having to pay the unreasonably high priced carrying-value the banks have placed on the assets. However, I have not seen any discussion of how bondholders/senior creditors play into this process. If the U.S. government wiped out equity holders, the bondholders/senior creditors have a contractual right to the assets of the bank, including the “toxic” assets. The U.S. government couldn’t just deprive bondholders/senior creditors of this property right without compensation. Wouldn’t the government have to pay the bondholders/creditors some arbitrary price for these assets — the same problem that has prompted calls for nationalization in the first place? If this is how the government would have to nationalize a bank in the U.S. it doesn’t seem very inviting. Can someone who knows explain how the logistics of a nationalization would work?

  8. Patrick

    Along with reckoning the preferred at par, as Hemant points out; aren’t they also increasing the yield on the left over preferred from 5% to 8%?

    Tuesday, this dilutes existing shareholders. Further, if they can’t raise private capital, then none of this will happen as it is a matching deal. Then you will probably see receivership.

  9. Anonymous

    Ryan says

    If this is how the government would have to nationalize a bank in the U.S. it doesn’t seem very inviting. Can someone who knows explain how the logistics of a nationalization would work?

    —–

    The government wipes out shareholders, and haircuts liabilities under bonds, swapd, and other obligations until the bank’s assets exceed obligations by a comfortable cushion, and then the bank issues equity to the creditors who got haircut.

    There is no asset purchase. The government’s claims get haircut or not just like all the other creditors. Since the government has preferred stock, the government is presumably wiped out. But that is fine as long as we stop giving these incompetent inept bank managements taxpayer blood and treasure.

  10. tompain

    “The government and banks have concluded that beefing up tangible common equity was a key to arresting the downward spiral in financial companies’ shares”

    Still no explanation as to why the government ought to be reacting to share prices rather than measures of operating stability. Some transparency here would be helpful. Are we to simply assume that any bank whose share price gets low enough will have to raise dilutive capital? That is a recipe for creating some gleeful short sellers.

  11. Swedish Lex

    So, Citi is going the RBS route? Creeping increased state ownership without a strategy for the end game? At what level of ownership will Uncle Sam (finally) throw out existing management and the Board of Directors, as the Brits eventually did with RBS?

  12. Majorajam

    Hemant makes a great point. What is very much undersppreciated here are the foreign policy considerations, and their implications for this crisis. Have a look at the list of major Citi stake holders. Now have a guess at the popularity of the decisions of all the soverign wealth funds who got conned into these ‘investments’ in our financial industry. If the federal government were not willing to take a bath right along with them, you might say that’d be something of a bitter pill. We’re zbout to run off somewhere in the vicinity of $tn in treasury issuance- the implications speak for themselves.

    Then of course there’s our special relationship with the house of Saud, and all that means in terms of influence on OPEC decisions and to a lesser extent, Arab- Israeli issues. In light of these things, The stipend to Citi, BofA, etc. shareholders is likely to be peanuts.

    Not that this excuses Treasury for not decapitating the board (although the state of affaors can hardly be blamed on Pandit. And not that I don’t understand the frustration at the broader injustice…

  13. mmdonner

    please help me here….there is so much talk about ‘creeping nationalism’ with the banks…or ‘gov’t intervention’.

    It seems…at best..that the gov’t is a very very reluctant intervener and is bending over backwards to avoid nationalization.

    what do the critics of these gov’t efforts offer as an alternative to these efforts??

    is it the hollow suggestion that private money should step to the plate and invest instead of the gov’t?? do these wall street insiders and cnbc talking heads feel the banks should be left to fail..that AIG should just fold its tent not having been able to find private market buyers for their distressed divisons of late??

    Help me out here please…i don’t get it when the former head of the SEC or some regional fed says…’creeping nationalization’ with such distain. never any follow up questions by interviewers as to what they would reasonably suggest.
    Help me please with this.
    Michael

  14. Anonymous

    Michael says,

    what do the critics of these gov’t efforts offer as an alternative to these efforts??

    ——-

    An obvious alternative is that the government seizes any regulated institution that can’t raise without governemnt support. The government wipes out shareholders, and haircuts liabilities under bonds, swaps, and other obligations until the bank’s assets exceed obligations by a comfortable cushion, and then the bank issues equity to the creditors who got haircut.

    The government’s claims get haircut or not just like all the other creditors. Since the government has preferred stock from many of its investments, and the big banks are insolvent, the government’s equity gets wiped out just like everyone else’s. But that is fine as long as we stop giving these incompetent inept bank managements taxpayer blood and treasure.

  15. mmdonner

    anony 11:47 says ‘gov’t seizes any..”

    ya, but that is gonna be called nationalizing.

    what is the alternative offered by the critics to seizing, intervening, nationalizing etc etc.

    i get that they should be seized now and quickly…or put in receivership etc. but it seems these alternatives are all lumped by critics as over reach by gov’t in one name or another.

    what is there alternative to gov’t intervention (called whatever you/they want to call it)?
    Michael

  16. Anonymous

    “what is there alternative to gov’t intervention (called whatever you/they want to call it)?”

    Have the government cut off all access to funding at the institions, and once they can’t pay their creditors, do involuntary bankruptcy filings on them.

    Bankruptcy is as totally private sector and capitalist. Birth and death or restructuring of companies are part of the process.

  17. Anonymous

    Majorajam said; “Hemant makes a great point. What is very much undersppreciated here are the foreign policy considerations, and their implications for this crisis.”

    What is really under appreciated here are the foreign policy considerations that intentionally created this crisis;

    Excerpt;

    “Given this storied history and two years of congressional testimony on oil trading skullduggery, one would expect to find volumes of current information available about this oil trading juggernaut. Instead, this company’s activities are so secret that its web site (www.phibro.com) is a one page affair and lists only the addresses, phone and fax numbers of its offices in the U.S., London, Geneva, and Singapore. No officers’ names, no bios, no history, no press releases. And while the Wall Street firms of Goldman Sachs and Morgan Stanley have been fingered by Congressman Bart Stupak (D-Mich) for gaming the system, Phibro has completely escaped scrutiny during a seven year period when crude oil has risen an astonishing 697%.

    Phibro is the old Philipp Brothers trading firm that has resided secretly and quietly on Nyala Farms Road in Westport, Connecticut as a subsidiary of the banking/brokerage behemoth, Citigroup, since the merger of Traveler’s Group and Citicorp (parent of Citibank) in 1998. Traveler’s Group owned Phibro at the time of the merger. Despite the fact that Phibro has provided Citigroup with $2 billion in revenue over the past three years, the 205-page annual report for Citigroup in 2007 carries only the following one-sentence footnote on commodity income that acknowledges the existence of this company. “Primarily includes the results of Phibro Inc., which trades crude oil, refined oil products, natural gas, and other commodities.”

    Combing through government archives, the first noteworthy appearance of Phibro occurs on April 6, 2001, when the Wall Street law firm of Sullivan & Cromwell sent a letter to the Commodity Futures Trading Commission (CFTC), the Federal regulator of oil and other commodity trading, acknowledging that it was representing “the Energy Group.” The letter was noteworthy because it delineated just who had teamed up to grease the oil rigging in Washington: namely, two investment banks (Goldman Sachs and Morgan Stanley); a house of cards that would later collapse (Enron); a proprietary trading firm inside a Frankenbank (Phibro inside Citigroup); and two real energy firms (BP Amoco and Koch Industries).

    What the Energy Group had long lobbied for and finally received from its Federal regulator was the breathtaking ability to trade oil contracts and oil derivatives secretly in the over- the-counter (OTC) market, thus avoiding the scrutiny of regulated commodity exchanges, their CFTC regulator, and Congress. The April 6, 2001 letter was essentially to say thanks and interpret the new rules as favorably as possible for the Energy Group.

    The change in the law occurred via the Commodity Futures Modernization Act of 2000 (CFMA) and is called the Enron Loophole. (Since Enron’s trading room went belly up along with the company, and Phibro is still trading oil secretly all over the world, it should perhaps now be called the Phibro Loophole.)

    What the CFTC also granted the big Wall Street trading firms was a license to sneak under the radar by using computer terminals located in the U.S. while trading oil on foreign exchanges like the Intercontinental Exchange (ICE) located in London but owned by an Atlanta, Georgia outfit that was funded and launched by Wall Street firms and big oil.

    On June 3 of this year, Dr. Mark Cooper, Director of Research for the Consumer Federation of America, correctly outlined the problem to the Senate Committee on Commerce, Science and Transportation:

    “The speculative bubble in petroleum markets has cost the economy well over half a trillion dollars in the two years since the Senate hearings first called attention to this problem…Public policies have made these markets the playgrounds of the idle rich, while consumers suffer the burden of rising prices for the necessities of daily life. We have made it so easy to play in the financial markets that investment in productive long term assets are unattractive…The most blatant mistake occurred when Congress allowed the Commodity Futures Trading Commission to forego regulation of over the counter trading in energy futures…Because there is no regulation of this huge swatch of activity, regulators have little insight into what is going on in energy commodity markets…Large traders who trade in commodities in the U.S. ought to be required to register and report their entire positions in those commodities here in the U.S. and abroad…If traders are unwilling to report all their positions, they should not be allowed to trade in U.S. markets. If they violate this provision, they should go to jail. Fines are not enough to dissuade abuse in these commodity markets because there is just too much money to be made.”

    The only correction I would make to the otherwise flawless argument above is that Wall Street is far from the playground of the “idle” rich. Wall Street executives spend every waking minute (and I’ve heard even dream about) how they can separate us from our money, our homes and a voice in Washington. How appropriate that Citigroup’s slogan is “the Citi never sleeps.”

    Let’s say the CFTC was not a compromised regulator, was not an audition stage and revolving door for million dollar jobs in the industry it regulates. Let’s say it genuinely wanted to report back to Congress on just how big a player Citigroup is in the oil markets. According to a February 22, 2008 filing with the Securities and Exchange Commission (SEC), Citigroup has over 2,000 principal subsidiaries (meaning it really has more but it’s not naming them). Of these, a significant number are secret offshore entities where records are unavailable to regulators. (For a mind boggling look at this sprawling octopus click here: http://www.sec.gov/ )

    So the CFTC can’t get its hands on all records and even in jurisdictions where it can, it first has to know under what names, out of a possible 2,000, Citigroup is trading oil and then aggregate the positions.

    On May 6 of this year, Tyson Slocum, Director of the Energy Program at the nonprofit watchdog, Public Citizen, testified before Congress on yet another roadblock preventing a meaningful investigation of oil price manipulation:

    “Thanks to the Commodity Futures Modernization Act, participants in these newly-deregulated energy trading markets are not required to file so-called Large Trader Reports…These Large Trader Reports, together with the price and volume data, are the primary tools of the CFTC’s regulatory regime…So the deregulation of OTC markets, by allowing traders to escape such basic information reporting, leave federal regulators with no tools to routinely determine whether market manipulation is occurring in energy trading markets…The ability of federal regulators to investigate market manipulation allegations even on the lightly-regulated exchanges like NYMEX New York Mercantile Exchange is difficult, let alone the unregulated OTC market.”

    Next comes what can only be described as an act of insanity on the part of the Federal Reserve. After allowing for the repeal in 1999 of the depression era investor protection legislation known as the Glass-Steagall Act in order to let Citigroup house retail bank deposits, investment banking, insurance, stock brokerage and speculative proprietary trading under one roof (the perfect storm that intensified the Great Depression) the Federal Reserve decided on October 2, 2003 that Citi wasn’t scary enough. It needed to allow this company that had already been named in hundreds of lawsuits for securities frauds and manipulations and could not remotely manage itself as a financial firm to ramp up its oil trading business by allowing it to take possession of crude oil on tankers because it would “reasonably be expected to produce benefits to the public.” Here are excerpts from the Fed’s release suggesting the expansive plans Citi had in the oil storage and transport business:

    “…Citigroup has indicated that it will adopt additional standards for Commodity Trading Activities that involve environmentally sensitive products, such as oil or natural gas. For example, Citigroup will require that the owner of every vessel that carries oil on behalf of Citigroup be a member of a protection and indemnity club and carry the maximum insurance for oil pollution available from the club. Citigroup also will require every such vessel to carry substantial amounts of additional oil pollution insurance from creditworthy insurance companies. Furthermore, Citigroup will place age limitations on vessels and will require vessels to be approved by a major international oil company and have appropriate oil spill response plans and equipment. Moreover, Citigroup will have a comprehensive backup plan in the event any vessel owner fails to respond adequately to an oil spill and will hire inspectors to monitor the loading and discharging of vessels. Citigroup also has represented that it will have in place specific policies and procedures for the storage of oil… The Board believes that Citigroup has the managerial expertise and internal control framework to manage the risks of taking and making delivery of physical commodities… For these reasons, and based on Citigroup’s policies and procedures for monitoring and controlling the risks of Commodity Trading Activities, the Board concludes that consummation of the proposal does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally and can reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.”

    Voting in favor of this unprecedented action was then Federal Reserve Chairman Alan Greenspan as well as current Chairman, Ben Bernanke.”

    Link, more;

    http://www.mail-archive.com/cia-drugs@yahoogroups.com/msg10493.html

    Deception is the strongest political force on the planet.

    i on the ball patriot

  18. mmdonner

    is this what the critics of gov’t intervention, seizing, nationalization saying?? let them fail?
    i know they say the private sector should step up…they are not in the case of citi…but are they saying that if the private sector does not step up it should just be allowed to fail? wasn’t the huge outcry about LB that they were allowed to fail and percipitated (in large part they say) this whole problem in the ‘first place’?
    so, huge cry out if citi is allowed to fail by those folks and huge cry out if the gov’t intervenes in one form or another.

    I just don’t get the direction offered as an alternative.
    Michael

  19. Anonymous

    “is this what the critics of gov’t intervention, seizing, nationalization saying?? let them fail?”

    Receivership is NOT nationalization. Nationalization implies backstopping claims of creditors (ie, Pimco, GS, EU Banks). I want receivership because it cuts off money from the taxpayer to bondholders like Pimco and swap counterparties like GS, Barclays, Rabo, DB, etc.

    Cut off US funding, give the equity to the creditors. Let them deal with the mess. If the asset prices keep falling, the government can repeat the cycle.

    There are very, very few people who want the banks to fail. They just want their capital structure reorganized by swapping debt for equity so the creditors bear losses from bad investments made by the banks. And the taxpayers don’t bear the losses.

  20. Eric L. Prentis

    The third sweetheart deal for Citigroup, this one courtesy of the Obama Administration/Geithner/Summers/Bernanke/Schumer/Dodd/Frank. The government commits $25 billion dollars, existing shareholders contribute $13.5 billion dollars, at yesterday’s stock closing price of $2.48 per share, with new private equity of $27.5 billion dollars (I will believe that when I see it), and amazingly they all get approximately equal shares in the company which, yet again, is a bad deal for taxpayers. In addition, Citi bondholders don’t pay anything which is horrible for taxpayers. Also, Citi CEO Vikram Pandit keeps his job and Citi replaces only 5 of 15 directors which is a terrible precedent. All Citi directors and senior management must go now before they squander even more government funds. When is the financial ruling class going to have to pay for their sins and not foist their junk off onto the US taxpayer.

  21. GloomBoom

    Check out this article at gloomboom.com:

    “Wall St. prison consultants to aid white collar criminals going to prison”

    Attn: Bernie Madoff

    “Wall Street Prison Consultants mission is to prevent its clients from being extorted, raped and assaulted once in prison.”

  22. Anonymous

    Those calling for a haircut to bondholders and swapholders (US depositors have first claim over those parties) have to realize that the result may be a toxic systemic “event” of unknowable magnitude. Ask yourself whether you want MetLife to go under.

    Maybe “liquidationism” is the right approach but let’s be honest about the full consequences.

    jult52

  23. Anonymous

    “Those calling for a haircut to bondholders and swapholders (US depositors have first claim over those parties) have to realize that the result may be a toxic systemic “event” of unknowable magnitude. Ask yourself whether you want MetLife to go under. Maybe “liquidationism” is the right approach but let’s be honest about the full consequences.”

    For the past 20 years, every time the financial industry has wanted something they’ve claimed there’ll be a crisis if they don’t get it. This is purely a marketing ploy.

    Here, if insurance companies and pension funds get equity in the banks, that won’t wipe them out. And if the banks assets are really and truly worth more than the market thinks, well, in time the pension funds and insurance companies will make back the money.

    Lookit, the taxpayer isn’t a sap to be robbed at will. They need a fair deal, just like everyone else. They’ve chiped in over a trillion dollars to help the banks and AIG. Now it is time for the bondholders and swap counterparties share the pain. It is time for shared sacrifice.

  24. Yophat

    Its called a banking roll-up…coming to every bank or credit union.

    Give the big ones enough cash to buy up the little ones….nationalizing the big ones in the process.

    At the end of the day, effectively one bank that can now be rolled into the World Bank.

  25. Anonymous

    Funny, CITI launders money because it is the only liquidity available.

    The problem with corrections or at least reinstating rules and regulations that only apply to US markets is it just chases greed to foreign unregulated markets.

    I wonder if the manipulators even understood how much destruction they could cause. Of course, why should they care, they are not going to be held responsible.

  26. Anonymous

    “Its called a banking roll-up…coming to every bank or credit union. Give the big ones enough cash to buy up the little ones….nationalizing the big ones in the process.”

    No, the regional and community banks are largely healthy. The big banks are the ones with big problems. Break up the big ones by giving the little ones money to buy peices of them.

  27. Anonymous

    From Bloomberg today:

    "The Treasury plans to have the banks conduct the stress tests themselves; regulators will check the results.

    A bank will check “potential firm-wide losses, including in its loan and securities portfolios, as well as from any off- balance-sheet commitments,” according to the Federal Deposit Insurance Corp. and other bank regulators.

    So Citigroup Inc., which didn’t even know it had a $25 billion off-balance-sheet exposure to toxic debt until that blew up in its face, will assess its own off-balance-sheet exposures. Government at work is truly a thing to behold.

    http://www.bloomberg.com/apps/news?pid=20601039&sid=av_BTw3JLGOs&refer=home

    Unbelievable…

  28. DanyBoy

    I’m sure everyone noticed that “the bank stress test” has failed Right Out of The Box on its first and most important assumption:

    That GDP in WORST CASE SCENARIO would only be -3.5%

    Revised 4QGDP (-6.2%)today suggests that there may be some key errors of modeling.
    Now perhaps you’ll say that this is just a single quarter and that the stress test uses annula GDP.

    However this is where real life departs from attempts at modeling it: stuff happens. And one bad quarter can be enough to force a bankruptcy when a bank is already in an extreme precarious state. Let alone two bad quarters.

    I think this demonstrates, as did LTCM and all the quant funds blowing up in 07-08 that even the most complex modelling is no match for the unexpected and violent forces at work.

  29. S

    For all the people who claim that the bondholders can;t take a haircut, as yourself: what is their next best alternative? Really, what is it? The only anwser is to threaten armageddon but beyond that they don;t have any alternatives unless you think GE and its dividend are the way to go. Can we once and for all put to rest this idiocy that bondholders cant take a haircut and the system will shut down. Somehow I bet that if that happened tomorrow there would still be a bid for oracle bonds.

    Disclocation in repo etc may ensue for a while, but anything worthwhile has a cost.

  30. Anonymous

    I don’t get it I didn’t go to harvard/yale etc. but I only know that if a business is run poorly it fails and most of the times someone else can come in and buy out its remaining assets and make a new go at it and many times it can prosper. When the new company takes over it DOESNT keep the same losers that ran the original business into the ground..I amamazed at how ignorant our politicians are..or do they consider us that stupid for not seeing their errors..when will this madness stop when is someone going to step up to the plate and address what is going on. let the losers fall by the wayside and stop throwing our money at them…

  31. Michael Fiorillo

    Some questions from an observer of the fascinating and occasionally diabolical world of finance:

    1. With Citi’s market value having fallen so low, and with all the justifiable concerns about its prognosis, haven’t its bondholders already taken big hits, and wouldn’t that consequently provide an avenue for its (at least temporary) stewardship by representatives of the people of the United States?

    2. Can’t a creative legal theory be devised to sidestep the sanctity – note the religious connotation – of the contract, vis-a-vis Citi CDS owners who don’t own the bank’s bonds?

    Wouldn’t that relieve some of the stress the system is undergoing? And while we’re at it, why not declare all naked CDS positions null and void?

  32. Anonymous

    “2. Can’t a creative legal theory be devised to sidestep the sanctity – note the religious connotation – of the contract, vis-a-vis Citi CDS owners who don’t own the bank’s bonds?”

    The Congress of the United States can pass laws under the commerce clause of the constitution to declear all CDS void. Holders would have a right to sue the Feds for compensation. However, compensation could be limited to the lower of purchase price or fair market value, which would screw over holders. But nothing good in life is free.

  33. Anonymous

    Receivership is NOT nationalization. Nationalization implies backstopping claims of creditors (ie, Pimco, GS, EU Banks). I want receivership because it cuts off money from the taxpayer to bondholders like Pimco and swap counterparties like GS, Barclays, Rabo, DB, etc.

    ————————————-

    This says it all. Receivership or Nationalization.

    Freemarket receivership means to lay the cards out on the table. let everyone that took risks, common holders, bond holders, retail investors to central banks take the hit. But what are the results? What impact will it have when you ask UK, EU, Japan and China central banks to take a hit? Is it enough to cause a full scale war? How did we get into WW1 and WW2 in the first place?

    On the other side Nationalizing protects a select group (mainly foerign investors with sway with their regional governments, or governments themselves from losses). Happy neighbors at the risk of domestic pain.

    IMO, The money invested by your neighbors was loaned on the chance of appreciation with risk. We lied to them. Magnified gains, minimized risk. telling them we aren’t going to pay them back will breed contempt. They will try to get it back. Even if it means beating it out of you. The US government and Fed are trying to protect the future of the USA, even if it means some short term pain at home.

    Remember that valuation is based on trust. If your neighbor values your trust they will invest in yo even if you may have slighted them one or twice. If you continue to slight them then you will have to start putting that money into stronger security to protect yourself because you just made enemies.

  34. Anonymous

    “MO, The money invested by your neighbors was loaned on the chance of appreciation with risk. We lied to them. Magnified gains, minimized risk. telling them we aren’t going to pay them back will breed contempt. They will try to get it back. Even if it means beating it out of you. The US government and Fed are trying to protect the future of the USA, even if it means some short term pain at home. “

    “WE” didn’t lie to the bondholders or counterparties. Nothing in the offering circulars or disclosures says the US government will backstop their investments in US banks or brokers. If they wanted US backstops, they should have invested in US Treasuries. They get what they pay for.

    Investment bankers lie to people all the time. Listening to them negotiate with each other is like watching scorpions dance. If investors trusted the banks and lost money, tough crap.

    And hell yes, I’m willing to go to war to avoid paying the banks creditors. They didn’t buy US treasuries, so they have NO legitimate claim to US tax money.

    So, let citi’s/AIG’s bondholders and counterparties take haircuts. I will happily allow extradition of all the bankers involved and all bank top management so that Saudi Arabia and China can try these people for fraud under local law. If that means China executes all the top management at the big US banks tough crap. They played for fire if they lied to foreign investors. The US taxpayer didn’t lie, so they shouldn’t be held responsible for the US bankers lies.

  35. Elizabeth

    I may be in the minority but I actually like this approach. Bondholders are not off the hook.

    *The US govt is in there with a number of other sovereign wealth funds and institutional investors.

    *You don’t wipe out the institutional investors who stepped up (perhaps stupidly) to put in additional capital but they are still not out of the woods – their fate and the US taxpayers is tied together.

    *While the board is not wiped clean, it is effectively now under the control of its largest shareholders.

    *This gives the US an inside leg to see what is going on and start an orderly unwind or separation of the non-viable parts.

    Nationalization- all the bondholders are off the hook. The US govt goes it alone.

    Liquidation – absolute disaster and destruction of value.

  36. Anonymous

    “*You don’t wipe out the institutional investors who stepped up (perhaps stupidly) to put in additional capital but they are still not out of the woods – their fate and the US taxpayers is tied together.”

    “Liquidation – absolute disaster and destruction of value.”

    Chapter 11 / receivership doesn’t destroy value. The bankers destroyed value over the past 10 years making bad investments. Chapter 11 /receivership restructuring gives the bankers exactly what they are entitled to and not a penny more.

    And the US taxpayer has already had his pocket picked for over 1 trillion dollars, mostly for equity that would be wiped out in a c 11. Fair is fair. Stop the bleeding of the US taxpayer, and force a haircut on bondholders (pimco, etc) and counterparties (gs, barclays, rabo, etc). If there really is value in the bank assets as Bernanke/Geithner claim, let the creditors have it by taking stock in the bank. If there isn’t let them take losses. Either way, it is not the taxpayer’s problem.

    Haircuts are only a problem to bank management who will see their equity comp vaporized.

  37. Anonymous

    Sux my taxpayer teats Citi … was that rude, does that exemplify the reason my nipples feel sore?

    Actually, one should say: If I were a member of Congress, I would allow more suckling pain now in exchange for future lobby funding, because all one has to do, is turn the other teat (now) …

    Ok, that was almost as stupid as this charade by Obama and all of Congress, so can I see the latest polls please?

    > The Democratic controlled Congress has its highest approval rating in two years, according to a Gallup poll released today.

    At 31%, the approval rating is “still quite negative on an absolute basis,” the polling outfit notes, but consistent with historical averages. Congress is never particularly popular—a 35% approval rating is the average for Gallup polls since 1974.

    However, Congress’s approval rating jumped a notable 12 points from January to now, built almost entirely on more favorable view from Democratic voters whose approval ratings jumped to 43% now from 18% in January. Similarly, independent voters’ approval jumped to 29% from 17%.

    >> Total BULLSHIT!

  38. Anonymous

    Erich Riesenberg

    FDIC puts banks into receivership regularly (look forward to an email today, most Friday afternoons).

    Normally, the majority of assets are quickly sold off to private interests. Not in the case of Citigroup. How could a pre packaged receivership possibly be kept secret until a weekend, as assets are priced and marketed?

    People railing against nationalization in favor of bankruptcy / receivership should pause and stop arguing semantics. Let the FDIC take over and sell assets as they can. I think it is still nationalization, you can call it bankruptcy.

    And, this swap to common equity is not bailing out shareholders. It is bailing out creditors. And incremental additions to equity will be made until creditors are comfortably whole. What is the point of the stress test? To let the government know more money needs to be given?

    It is still wrong. We should be focusing on letting good, sound banks operate without competing against Treasury supported banks.

  39. alex black

    So, Citigroup still has its “stress tests” to endure. Can we use some of the stress tests we used at Abu Ghraib?

  40. Anonymous

    Sy Krass said…

    Alex Black, I don’t think putting female underwear over Vikram Pandit’s head will give us any more clarity on the viability of Citigroup. HAHAHAHAHAHAHAHAHA!!!!!!!!!!!

  41. Anonymous

    Out of Reach’

    “This is now a great opportunity to buy or refinance,” said Satnick, 44. “But getting the mortgage has gotten so hard it’s putting those properties out of reach of a lot of people.”

    Another strain on consumers is a planned increase by Fannie Mae of add-on fees called loan-level price adjustments, which lenders often pass on to borrowers. Someone with a 699 FICO score borrowing 80 percent of the value of a home used to pay 1 percent in price adjustments. As of April 1, Fannie Mae will raise that to 1.5 percent. For a borrower with a 659 score, the adjustment will climb to 3 percent from 2.25 percent.

    “These are targeted pricing adjustments aimed at aligning price with risk for the highest risk products in the market today, including interest-only loans, cash-out refinancings, low credit scores, high loan-to-value loans and condos,” said Fannie Mae spokeswoman Amy Bonitatibus.

  42. Dave

    This is just theft, Theft, THEFT! There is no other word for it.

    Tell me this: if a local government or state government department issued a sole-source tender to a company, and purchased its wares at inflated, above market prices, and this was discovered, it would surely be seen as THEFT and FRAUD, right?

    So how the HELL is this equity injection into C any different? Quis custodiet ipsos custodes? Indeed.

    I hope that in the fullness of time Ben Bernanke, Tim Geithner, Larry Summers and the rest go to JAIL for this.

  43. Anonymous

    “I hope that in the fullness of time Ben Bernanke, Tim Geithner, Larry Summers and the rest go to JAIL for this.”

    If they keep printing money, there’ll be a populist backlash electing nazi or commie leaders that execute all of them as enemies of the state.

  44. Anonymous

    Someone at work is trying to buy a condo right now. We told her not to pay points but it seems all the loans require points.

    Points are “you pay us now so that when you default we’re ahead anyway.”

    I told her not to hurry and stay in her rental apartment but she has the fever now, cannot stop her …

  45. Anonymous

    This was posted last night. Is this related?

    > Damn, I'd have to think on that??

    1. The U.S. Treasury will invest $20 billion in Citi preferred stock

    2. The December 31, 2008 report on the Program notes the unique guarantee accounting mandated by the Act and outlines Treasury’s considerations when evaluating a guarantee structure. The guaranteed portion of the troubled asset reduces, on a dollar for dollar basis, the funds available for use under the Act, offset by the value of any cash premium received by Treasury. Non-cash premiums, such as preferred stock, will not offset the reduction of available resources under the Act. As a result, Treasury will evaluate on a case-by-case basis the troubled assets to be covered by the Program to minimize the impact on available funds.

    3. On January 15, 2009, Treasury extended the Program to Bank of America (BofA), protecting against the possibility of losses on an asset pool of approximately $118 billion of loans and securities. The majority of these assets were assumed by Bank of America in its acquisition of Merrill Lynch. The assets will remain on BofA’sbalance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to Treasury and the FDIC. The agreement provides that after additional pool losses of $10 billion, Treasury and the FDIC will guarantee against 90% of the next $10 billion of loss. At any time after the loss on the asset pool reaches $18 billion, the Federal Reserve will make a loan available to BofA for 90% of any subsequent loss.

    I know that doesn't help, but I'm not in charge and I'm still thinking …OK?

  46. Anonymous

    “so how might the 5th amendment and its ‘taking clause’ relate”

    Easy, if the Feds void all CDS under the Commerce Clase of the Constutition. They specify that damages to holders are the costs they bore in buying credit protection. Courts will uphold that measure of damages as reasonable.

  47. Anonymous

    The Treasury has agreed to convert some of its current holdings of preferred Citigroup shares into common stock, a move that could better protect shareholders against future losses.

    Hmm… sounds like some of those shareholders are also high-ranking members of the Obama administrations…

    Vinny

  48. Anonymous

    DanyBoy The Capitalists have fled to Beijing. The Communists are in Washington.

    I’m not sure about that. To me it looks more like the shameless thiefs are in Washington.

    Vinny

  49. Juan

    3:53, The US taxpayer didn’t lie, so they shouldn’t be held responsible for the US bankers lies.

    Is somewhat analogous to

    We do not accept a situation where people who had no part in the process of taking a loan, and in most cases never benefited from the loan, are burdened with repayments for such loans. Classical examples of such debts, commonly referred to as odious debt, include debts inherited by democratic governments from dictators as is the case with Mobutu in the Democratic Republic of Congo (formerly Zaire) and Banda in Malawi and from colonial and apartheid regimes as typified by South Africa.

    There is such thing as illegitimate debt that, until recently, has primarily impacted people of the ‘global south’…

  50. K Ackermann

    I’m not a lawyer, but I did stay at a Holiday Inn last night, and here’s my thinking on CDS’s:

    CDS’s may be a contract between two parties, but they should be declared illegal because they never address the 3rd party they affect.

    The notional value of these contract written introduced a 3rd party that actually absorbs most of the risk of these instruments.

    The 3rd party was never consulted, nor is offered compensation for the risk.

    To me, it’s a second-hand smoke case.

    Actually, it’s even simpler because unlike second-hand smoke, which may or may not have caused cancer, using taxpayer dollars to avoid a systemic calamity, such as the stated reason for AIG’s repeated rescues, has a direct causal link.

  51. d4winds

    Your perspective on CDS’s as getting free counterparty risk insurance from Uncle Sam, the 3rd party, is dead on.

    But the market in “naked” CDS’s, where the protection buyer does not own an underlying bond, is even more perverse. These positions amount to one party betting on the value of the firm’s debt against another party subject to collateral postings–margin calls–when neither party owns the underlying security.

    Our forefathers outlawed such instruments on stocks by state laws after the Panic of 1907, to whose severity they contributed. The contracts were created by so-called “bucket shops” [on Wikipedia]. By contrast to the CDS market today with its free insurance from the USG, back in 1907 the margin calls had to be covered by the private party.

    The Commodity Futures Modernization Act of 2000–Phil Gramm was its architect and WS vigorously lobbied for it–specifically exempted securities like CDS’s from the state anti-bucket shop laws. After enactment of this act, the CDS market exponentially exploded.

    So, the CFMA expressly legalized a gambling activity our ancestors had learned from bitter experience to outlaw; and, now the uncompensated 3rd party (taxpayer) is guaranteeing the gambling debts. But the insurance scheme kicks in only if their bets, like those by GS and AIG, were big enough. Poor devils like Indymac who just didn’t bet big enough did not receive this free insurance and have had to go the way of FDIC receivership/Chapter 11.

  52. Anonymous

    “so how might the 5th amendment and its ‘taking clause’ relate”

    If shareholders and creditors of a bank lose their stakes in bankruptcy, they have no claims under the constitution for a taking. Receivership is a form of bankruptcy, so this applies to receivership as well.

    CDS claims can be voided with the holders getting compensation under the takings clause, but the damages will be crap. The damages will be the lower of cost paid for the swap protection or fair market value. Not the payout if the reference credit defaulted.

  53. Anonymous

    “decisions of all the soverign wealth funds who got conned into these ‘investments’ in our financial industry”

    It is not only the SWFs that were conned but also millions of modest means fixed-incomers reaching for yield and the safety of AAA rated C and GMAC and ….. How can the government follow the libertine solution of simply wiping out the bondholders and stockholders when the radical GWBush/Greenspan government is responsible for creating and sustaining the financial meltdown.

    The financial crisis is the culmination of thirty years of policy by and for banking, corporate, and wealthy interests at the expense of the middle and less well off American classes.

    There has been no area left untouched in the rush to dump financial responsibility (transfer risk) for retirement, healthcare, unemployment, etc on the average citizen while continuously rewriting the rules to make it increasingly easy to steal from him/her.

    O’bama has fired the opening salvo, starting with the no brainer of immediately raising taxes on the leaches who are responsible for this mess. Libertarian bull shit about nationalization is just that, BS.

    For now, the overthrow of the US by home grown financial terrorists has been narrowly avoided. The chaos following an abrupt, and poorly considered, nationalization is just what the Bush crowd was after.

  54. Anonymous

    “It is not only the SWFs that were conned but also millions of modest means fixed-incomers reaching for yield and the safety of AAA rated C and GMAC and ….. How can the government follow the libertine solution of simply wiping out the bondholders and stockholders when the radical GWBush/Greenspan government is responsible for creating and sustaining the financial meltdown.”

    Most bonds are held by people with that have liquid assets of over 1M or 10M.

    We can help people who hold small amounts of bonds like we did with FDIC backing for money market funds for 250,000 or less. But protecting the bondholders and swap counterparties of banks would cost 3 to 5 trillion dollars, and it is completely unreasonable to expect taxpayers to pay that much money.

  55. Jim T

    Where in the hell is our President?

    I want “CHANGE I CAN BELIEVE IN”, not the “MORE OF THE SAME”. Bank stock and bond investors protected and bailed out at the cost of the Tax Payers! THAT IS EXACTLY WHAT THE BUSH ADMINISTRATION DID AND NOTHING HAS CHAGED WITH THE OBAMA ADMINISTRATION!

    I DON’T GIVE A SHIT ABOUT INVESTORS THAT PLACED THEIR BEDTS AND LOST! THAT IS THE NAME OF THE GAME, SO WHY ARE WE PAYING FOR THEM NOT TO LOSE?

  56. Anonymous

    February 28, 2009

    Case Study Econ. 407, Final Grade:

    Company X has a market cap of $8.18 billion as of DJIA market close 02-28-09.

    Entity Y purchases 36% of company X for $25 billion on same day.

    Solve: Why would entity Y pay a premium of $22.05 billion premium over market price for company X common stock?

    32% premium my ass.

  57. Dave

    To anon (above) — absolutely spot on! But I guess “at a premium of 300% to quoted price” doesn’t quite have that same ring to it, does it?

    Like I said in my earlier post, I cannot see how these actions by Geithner et al can be construed as anything other than a gross act of theft and fraud upon the US taxpayer. I sincerely hope in the fullness of time that they are held to account and sent to jail where they truly belong.

    And to the earlier poster talking about naked CDS contracts — again, another spot-on statement.

    If derivatives are “dangerous” “weapons of mass destruction” (Buffett), then naked CDS could only be described as “spawn of the devil” stuff!

    A naked CDS contract is an insurance policy, and it is this analogy that is most telling. Basically, if I were able to get home insurance in the same way as credit insurance (a CDS), then I could take out FIRE insurance on YOUR family home, despite having no economic interest in your property.

    Hmm, short gedunken experiment – I wonder what happens next?

    I can just see the newspaper by-line now … “Last seen with a jerry-can, and the sound of sirens in the distance”

  58. ruetheday

    “O’bama has fired the opening salvo, starting with the no brainer of immediately raising taxes on the leaches who are responsible for this mess.”

    If his plan encompassed hiking the taxes on dividends and capital gains, instituting a Tobin-esque tax on ALL financial transactions, and instituting a punitive new top marginal income tax rate on unearned income over $1 million per year, I’d be inclined to strongly agree. Simply raising the income tax rate on all households earning over $250k/year punishes a whole lot more people than the “leaches responsible for this mess”.

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