Terms of the Citigroup bailout

On November 23, 2008, the Fed with participation by the Treasury and FDIC announced a rescue plan for what has been the nation’s largest banking concern Citigroup. The company has seen a drop in its share price in the last year from a high of $57.40 to a low of $2.91. Part of this reflects bad decisions it made. However, a lot of its recent fall was the work of short sellers which the SEC has done almost nothing to curb, despite the instability they produce.

The Citigroup bailout consists of a government backed guarantee on $306 billion of the bank’s assets. The company will be responsible for the first $29 billion in losses. After that there will be a 90-10 split on losses between the government and Citigroup with the government responsible for the 90% share. Treasury will take the first $5 billion of these through the TARP. The FDIC is then in for the next $10 billion and the Fed is in for the rest to the $306 billion limit. In exchange for this guarantee, Citigroup will give the government $7 billion in stock with an 8% dividend ($4 billion to Treasury; $3 billion to the FDIC). It agrees to pay no more than 4 cents a year per share in dividends on its other stock and to submit a plan to limit executive compensation. In addition, Treasury will make a direct $20 billion investment in Citigroup. All the stock the government gets in the deal will be non-voting, or in other words more of the same: Citigroup gets the money and gets to keep its top management, and the taxpayer gets neither ownership nor control but does assume the risk.

(This is part of item 87 of my scandals list.)