Citi Bailed Out, But for How Long?

Citigroup received the government bailout today that everyone knew was coming. The question is will this be enough and will Citi be back on the hot seat in a couple of months?

Citigroup today received the government bailout we all knew was coming.  The bank had long been tagged as too big to fail and as a result the government package was no surprise.  Taxpayers gave Citi:

  • $20 billion dollars in additional capital from the TARP.
  • The goverment will guarantee approximately $306 billion of Citi assets.  Citi must absorb the first $29 billion of losses and 10% of anything beyond that while the Treasuery will absorb the next $5 billion and the FDIC the next $10 billion.   The Fed will take anything beyond that.
  • Citi will provide the government with $7 billlion of preferred stock that pays an 8% dividend as compensation for the guarantee.
  • Citi will also issue warrants to the Treasury and the FDIC for some 254 million common shares at a strike price of $10.61.
  • The government has veto power over executive compensation.
  • Effective the next dividend period, Citi's dividend was reduced to .01$ per share for the next three years.

The Federal government is now the largest shareholder in Citigroup, owning a 7.8% stake in Citigroup, according to Chief Financial Officer Gary Crittenden.

So, will this be enough? 

Citi now has over $70 billion dollars of equity at its disposal.  But even that huge amount is relatively small compared to the $2 trillion in assets on and off Citi's balance sheet.  And the biggest problem is that Citi has a huge exposure in developing economies.  Many of those economies have been hard hit by the banking crisis, are in recession, and could face significant bankruptcies and failures over the next year.  Combine that with the domestic US economy that continues to spiral downward, and it's not hard to envision that capital being depleted rather quickly.

At some point, the government will not be able to bail out every industry and we will see more company failures.  This will impact the banks that lent to them.  Citi was the largest bank in the world with more loans then any other bank so it's hard to see that it won't take additional hits. Many see the commercial real estate marketing weakening and several developers and mall operators have already gone under.

Unless the economy improves or stabilizes over the next couple of months, Citi may find itself in a similar position.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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