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Well, the deal is done. Citigroup reached a deal with the Feds whereby the government will backstop $306 billion of its crappy assets. Note that the assets are not being taken off the balance sheet (TARP is dead). In exchange, the government will get 8% preferred shares (i.e., our crappy assets). The government will also kick in another $20 billion of TARP money (Update: TARP lives!)

For its troubles, Citi will now have to comply with the exec comp restrictions plus it has to go along with the FDIC's mortgage modification program.

There’s a lot going on here so let’s look at the objectives. For one, the government is aware that other troubled banks are watching this deal. Even if other banks never get it, a bar has been set that will influence future behavior.

There’s also the question of preferred shares versus warrants. That could go either way. If it works and the price is good, the warrants could be a very good deal for taxpayers. Actually, it could be an insanely good deal. That’s a risk, however, I’m not inclined to take. For one, what price? Citi’s dropped something like 60% in the past few days. The warrants in this deal have a price of $10.61 which is the 20-day trailing price. Friday’s close was $3.77. You do the math. I don’t get why the preferreds pay 8% instead of the previous 5%. For taxpayers, I don’t see why we can’t get the same 10% that Buffett got from Goldman.

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.

Here's the Summary of Terms.

Posted by edelfenbein at November 24, 2008 1:08 AM