Citibank Bailout: $300 Billion Doesn't Sound Like A Lot Anymore

Nov.24.08 | About: Citigroup Inc. (C)

The Wall Street Journal reports that Citibank (NYSE:C) has become the latest recipient of a government bailout - this one to the tune of $300 billion, or thereabouts, depending upon how you do the math which, in this case, appears to be quite complicated.

Somehow, $300 billion doesn't sound like a lot of money anymore ... it should.

Yesterday they were talking about a $500 to $700 billion stimulus package that will be on President Obama's desk, ready to sign, on inauguration day.

That must be a new record - a cool trillion in government commitments in a single day.

The federal government agreed Sunday to take unprecedented steps to stabilize Citigroup Inc. by moving to guarantee close to $300 billion in troubled assets weighing on the bank's books, according to people familiar with details of the plan.

Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. Treasury officials will charge a higher interest rate for the capital injection -- 8% for the first few years -- than it has charged to dozens of other banks now borrowing money under the government's the $700 billion rescue package approved by Congress last month.

In addition to the capital, Citigroup will have an extremely unusual arrangement in which the government agrees to backstop a roughly $300 billion pool of its assets, containing mortgage-backed securities among other things. Citigroup must absorb the first $37 billion to $40 billion in losses from these assets. If losses extend beyond that level, Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed.

Well it's a good thing we have the Fed to bat cleanup.

Later in the report they mention $1.23 trillion in "entities" that are still being kept "off the books" at Citibank. Based on their current $2 trillion in "entities" that are "on the books", even more government help may yet be needed.

This video might help to explain why big banks keep getting bailed out. The late Mr. Carlin starts out talking about education but quickly turns his attention to Wall Street.

Favorite line: "It's a big club, and you ain't in it. You and I are not in the big club"