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November 24th, 2008

Count Citi Among the Necessary

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Last evening Citigroup reached an agreement with the Treasury Department, the Federal Reserve, and the FDIC to help the failing bank increase their capital, minimize risk, and boost liquidity. Citi’s stocks have been in a free fall in recent weeks; in this climate, raising capital in the markets would be next to impossible. Last week alone, Citi’s stocks plummeted more than 60% to a 16-year low, and the company “lost $160 billion of market capitalization in the past year.”

The U.S. Treasury plans to invest $20 billion out of the TARP fund in Citi’s preferred stock and will receive an eight percent dividend per share. The payment of dividends have been stopped for other shareholders in order to build up additional capital. The government’s collection of eight percent on these preferred shares allows for some potential recovery of the investment of tax dollars. In return, Citi will see the government guarantee $306 billion worth of securities, loans, real estate obligations, and other assets currently on their books. Citi will be responsible for the first 29 billion in losses; the government responsible for the rest if any. The government’s guarantee, a kind of insurance, allows the $306 billion portfolio to have a lower risk weight which frees up an additional $16 billion in fresh capital.

In addition to helping Citi secure ample capital as well as preserving them against future risk, the government has opened numerous doors of liquidity previously unavailable to the global financial institution. “Citi has been provided expanded access to both the Federal Reserve’s Primary Dealer Credit Facility and the discount window, resulting in strong additional liquidity resources should they be needed. Citi also has access to the yet-unused Federal Reserve’s Commercial Paper Funding Facility and intends to issue debt under the FDIC’s Temporary Liquidity Guarantee Program,” said the bank in their news release.

Why did the U.S. Government act so swiftly and decisively in securing Citigroup, but has stalled while demanding much more from the American auto industry before they are provided aid?

“Citi is truly a global bank,” said HSH Vice President Keith Gumbinger. “Today’s move is to promote a systemic stability,” he said. The U.S. government controls the terms of these transactions — they have the direct ability to influence how the money is used. Detroit auto execs have yet to articulate their plans on how $25 billion of taxpayer money will be used.

Critics of the bailout should understand that little private benefit or value is gained through the agreement. Private shareholders have already seen their investments battered to new lows, and stand to gain little immediate benefit through this deal. Again, the argument of “too big to fail” continues to lead these kinds of arrangements, designed to increase lending, and keep the financial system from failing.

Keith Gumbinger contributed to this article.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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