In spite of insisting it is “well capitalized”, a Citigroup Bailout Agreement was negotiated involving the Fed, the Treasury, and the FDIC.

Here are the Summary of Terms. Following is a lost of some of the more important terms. Click on the link for complete terms.

Size: Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).

Deductible: Institution absorbs all losses in portfolio up to $29 bn (in addition to existing reserves). Any losses in portfolio in excess of that amount are shared USG (90%) and institution (10%).

USG share will be allocated as follows: UST (via TARP) second loss up to $5 bn; FDIC takes the third loss up to $10 bn;

Financing: Federal Reserve funds remaining pool of assets with a non-recourse loan,
subject to the institution’s 10% loss sharing, at a floating rate of OIS plus 300bp. Interest payments are with recourse to the institution.

Preferred Stock: Institution will issue $7 bn of preferred stock with an 8% dividend rate (under terms described below). $4 bn of preferred will be issued to UST. $3 bn will be issued to the FDIC.

Management of Assets: 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.

Risk Weighting: Institution will retain the income stream from the guaranteed assets. Risk weighting for assets will be 20%.

Dividends: Institution is prohibited from paying common stock dividends, in excess of $.01 per share per quarter, for 3 years without UST/FDIC/FRB consent.

Executive 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.

That is a partial list of terms. Click on the above link for complete terms. Note the restriction on dividends for three years and the restrictions on executive compensation.

Taxpayers are conceivably on the hook for 90% of ($306 billion – $29 billion), in other words about $249 billion. But where does this money come from? Congress did not appropriate $249 billion for this.

This bailout represents a huge taxpayer risk. Yet it’s important to note that not all of the collateral will go bad. The percentage that might go bad depends on the valuation and selection of assets.

Transparency is an issue in light of Bloomberg’s freedom of information lawsuit against the Fed for refusal to disclose how it has used the $350 billion in TARP funds allocated by Congress. Thus, inquiring minds are questioning how the valuation and selection of assets will occur, but so far there are no answers.

Nonetheless, if Citigroup really believes that it is “well capitalized”, the Citi may not be happy with these terms, especially the loss in ability to pay dividends.

Mike “Mish” Shedlock
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