Citi gets TARPED

Going to this previous weekend the main concern was the problems with Citibank. In the weekend, there were numerous talks and views on how to save Citi.

And on Sunday night, Citi finally got TARPed. Fed, US Treasury and FDIC have issued a joint press release and the deal details. The details of the deal are here. In sum:

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.

So, a bit of both for Citi- Guarantees for Assets and Capital infusion. (For a detail on TARP, see this) .

Trying to read the detailed statement, again leads to confusions and need for clarifications. All these US govt institutions have number of economists and I still don;t understand why can;t they be asked to draft a clearer way to explain the deal. They could use pictures/graphs and show the balance-sheet to show what goes in and out. The press release repeats what it says on each intervention:

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.

Unfortunately, the taxpayers can never really understand what is going on. As I have said in numerous posts (see this for an example)- private sector financial engineering and complex statements are being replaced by public sector. The former used shareholders money and latter are using taxpayer’s money and both not explaining what is really going on.

James Kwak (of the superb Baseline Scenario Blog) tries to explain the deal and says – Citigroup Bailout: Weak, Arbitrary, Incomprehensible.


FT Alphaville as usual has a great post on the deal and why it will not work

5 Responses to “Citi gets TARPED”

  1. James Kwak Says:

    I’d like to just point out that I wrote the “Weak, Arbitrary, Incomprehensible” post, not Simon. Simon and I co-author the blog and agree on many things, but I actually haven’t talked to him since the deal was announced so I don’t know what his opinion is.

  2. Ron Towns Says:

    Does anyone else feel like these bailouts are rash and feeble? The government needs a long-term plan, rather than trying to jump-start matters. They need to set a goal and see their idea through successfully!

    I think another vital note from this bailout is that we now see the magnitude of this recession. We all should take the necessary steps to recession-proof our lives. In order to do so, I think a realistic estimate of the amount of money we need to cut back on is relevant. Additionally, we all should have a clear vision of our altered future- many people are still living as if we’re in the .com boom of the 90’s! Here’s a great resource I found helpful when reorganizing my future: This kit actually outlines how to create a vision of your goals and dreams and explains how to execute them with success.

  3. patrick Says:

    my initial thought upon hearing about Citibank’s potential bankrupcy was, Sweet! does this cancel out the small fortune’s worth of debt I have stored up on my trusty Citi-card?

  4. Munis next to be included in TALF? « Mostly Economics Says:

    […] purchase USD 600 bn of securities of GSE, makes it a USD 800 worth of bailout. And if we include USD 326 billion of Citi’s bailout, it is a trillion dollar support from US authorities in a week. I had pointed in my reportthat […]

  5. macro economics | Says:

    […] Citi gets TARPED … The former used shareholders money and latter are using taxpayer’s money and both not explaining what is really going on. Simon Johnson tries to explain the deal and says – Citigroup Bailout: Weak, Arbitrary, Incomprehensible. Posted in Central Banks / Monetary Policy, Economics – macro, micro etc … […]

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