It had to happen, and so it has.
The Treasury department in coordination with the FDIC and the Fed has bailed out Citigroup. Here is a summary of the deal terms.
The bottom line is that this is a very good deal for Citigroup. They get $20 billion and a 90% guarantee (from you) on all of their junk assets (after the first $29 billion in losses) and in return they merely have to issue a little preferred stock to the U.S. Government. Citi should no longer have liquidity problems as they will likely be able to raise cash against the government’s guarantee (after all, if there’s no downside risk, why not?) Two other key sections:
USG will provide institution with a template to manage guaranteed assets. This template will include the use of mortgage modification procedures adopted by the FDIC, unless otherwise agreed.
Compensation: An executive compensation plan, including bonuses, that rewards longterm
performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG.
The mortgage modification aspect is important and the FDIC is involved (they have a smart, workable plan). Although I am opposed to all of these bailouts in principle (in practice, something must be done), it is essential that we provide relief to homeowners as well. They are the root of the problem, and though they are as guilty as anyone, fairness and financial common sense dictates that we help them too.
As for compensation, the Feds should insist on a UBS model of pay for performance. That is, payment spread over three years with modifications based on continued performance. They should also set ceilings on reward.
There is one other problem with this bailout. From the Wall Street Journal:
The agreement marks a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions…
…Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.
“The problem is that other banks would want to get in line” for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. “Is there enough money to do that?”
This is the problem, isn’t it? We simply can’t afford to take all of the junk assets off the books of financial institutions. And yet, ultimately, I’m afraid, that’s exactly where this is headed. Who’s next in line for some taxpayer largess?
I now see an outline of how this will end. The Government will pick and choose who to bailout and guarantee their junk. Working with these institutions, they will aggressively prune irredeemable loans and modify the rest. Taxpayers will take the loss. And on the guarantee the institutions will raise the cash they need to begin soaring again.
Uncle Sucker (you and me) will take it on the chin while a lot of bankers and irresponsible borrowers get away with it. Sure, there will be a few prosecutions, but for the most part, we’re just going to have to like it.
And, by the way, it’s still going suck out there.
Merry Christmas to Citigroup.