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
One way Citi may have been able to avoid this second round of bailouts is if it had won the battle with Wells Fargo
The biggest loser from all of this? I don't think it's Citi, Paulson, or taxpayers -- I think it's Chrysler, General Motors
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.
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