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Citigroup Comes Back for Seconds

Citigroup's (NYSE: C  ) website greets customers with a page-long banner that reads "We work to turn dreams into realities."

Dreams ... nightmares ... whatever.

Back so soon?
What used to be the largest company in the world is now part of one of the largest bailouts in the world. Barely more than a month after receiving a $25 billion injection from the Treasury, a one-week swoon in its stock price sent Citi limping back to the Treasury, hat in hand, for second helpings.

As part of the new bailout, Citigroup will get:

  • An additional $20 billion capital injection.
  • A backstop on $306 billion in assets. Citi will accept the first $29 billion in losses in that pool; taxpayers will eat most of the rest.

In exchange, the Treasury (taxpayers) will get an additional $27 billion in preferred shares yielding 8% and warrants to purchase $2.7 billion in shares sometime down the road. Citi will also be barred from paying a dividend over $0.01 per share for three years. Why $0.01 per share? My guess is that if it were to suspend the dividend altogether, shares would come under increased selling pressure from dividend-centric mutual funds that can't own non-dividend-paying stocks.

Sell now, ask questions later
By most accounts, Citigroup was and is adequately capitalized. So why the need for a second bailout? The insane plunge in its share price and the speed at which it came crashing down was probably eerily reminiscent of the collapses of Bear Stearns, Lehman Brothers, and Washington Mutual: Rumors beget rumors and selling begets selling, until a run on the bank brings an already-vulnerable company to its knees.

Keep in mind Citigroup has total assets, including off-balance-sheet items, of over $3 trillion. That's five times the size of Lehman Brothers, whose collapse many point to as the main culprit for the market's cliff dive over the past two months. Of course people are going to point to this latest episode as proof that Paulson's plan doesn't work, but when you think about the ramifications of a Citigroup collapse versus the alternative, something had to be done. Citigroup has over 200 million client accounts in 100 countries -- anyone want to take a stab at what that bankruptcy would have looked like, or what effect it would have on an economy already in the throes of a nasty recession?

Will it work?
With that said though, let's keep in mind one of the reasons Citi plunged last week: fear that the first round of TARP money which injected $250 billion into banks like Citi, Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) won't be enough to stop the hemorrhaging. That fear might be spot on. As mentioned, Citi has around $3 trillion in assets, so the first $25 billion received from the Treasury added a cushion of just 0.8%. The latest injection brings that total to around 1.5% -- small potatoes when you think about the mayhem in credit markets.

One way Citi may have been able to avoid this second round of bailouts is if it had won the battle with Wells Fargo (NYSE: WFC  ) over Wachovia (NYSE: WB  ) . That deal would have strengthened Citi's balance sheet with a fat deposit base that could be used as a cheap funding resource to mend its troubles; of course, the deal also called for government assistance in backstopping losses on $312 billion of the combined entity's assets. Potato, po-tah-to.

The biggest loser from all of this? I don't think it's Citi, Paulson, or taxpayers -- I think it's Chrysler, General Motors (NYSE: GM  ) , and Ford (NYSE: F  ) . One of the central reasons Congress has been hesitant to lend Detroit a hand is fear that it'll just blow through the cash and come back asking for more, which is essentially what Citigroup has done, at least at first glance. If companies that are undeniably in better shape than GM and Ford can't stop their bleeding, good luck trying to convince Washington that Detroit hasn't reached the point of no return.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Motley Fool is investors writing for investors.

Read/Post Comments (8) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 24, 2008, at 2:00 PM, Knobee wrote:

    How can we (the tax payers) be stupid enough to allow this to happen? Oh, right... this time, we were never asked.

  • Report this Comment On November 24, 2008, at 2:07 PM, weiwentg wrote:

    Would you rather Citi have gone into liquidation? That could have been an extinction level event for the entire national economy.

    The only reason I'm not furious at Citi is because I bought some shares of BCE as an arbitrage play. BCE is a relatively stable business. Given that Citi still exists, they have good reason (aside from being contractually bound) to continue to fund the deal.

  • Report this Comment On November 24, 2008, at 3:03 PM, player23m wrote:

    How exactly does a 0.8% into Citibank alone translate into a 5% total market gain? The answer: the only investors buying in the market right now are total idiots or day traders stealing from all the idiots. Completely unbelievable stupidity happened today, even Obama and his elite team predicts further loses, near 10% unemployment, and promise no help for businesses much more important than Citi. There was no good news today, only more losses and larger than expected losses. Wake up people!

  • Report this Comment On November 24, 2008, at 3:05 PM, toolzfoolz wrote:

    Citigroup may be very large, and I hate to see it for the sake of further hurting the economy, but if it does not change it's business practices, it's going down, and in a big way. Maybe they will learn in time....If they can save themselves with a little help, perhaps there is hope for Ford and GM too, and a chance we'll get out of this mess without a total bottoming out of the economy.

  • Report this Comment On November 24, 2008, at 4:37 PM, Joelshann wrote:

    Pop over to the F or GM boards and make that same comment (last paragraph) and be ready for a deluge of reasons why the Government is just about to make a killing by loaning money to these heartland companies (yet, surprising, how little money they've made over the past "bountiful" years).

  • Report this Comment On November 24, 2008, at 7:33 PM, dividendgrowth wrote:

    If Citi goes down, you won't have to worry about paying taxes to the government. In fact, you will more likely be lining up outside soup kitchen receiving something from the government.

  • Report this Comment On November 24, 2008, at 10:03 PM, 123go100 wrote:

    what happen to antitrust laws? nobody should be to big to fail.

  • Report this Comment On November 25, 2008, at 5:00 AM, Daretoth wrote:

    To big to fail is a myth spurred on by a government that desires to grow larger and Wall Street that made some extremely stupid mistakes.

    No one is too big to fail. Not even the U.S. government. And injecting more tax dollar money into a company with terrible business practices will eventually hurt both the taxpayer and the company in the long run.

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