Citigroup deal could be template

Image via WikipediaCitigroup deal could be template for other banks: By Pallavi Gogoi, USA TODAY

NEW YORK — The latest bailout of Citigroup (C) helped soothe financial markets Monday and could serve as a model for other U.S. banks looking for help with their large portfolios of toxic assets.

The U.S. government late Sunday offered $20 billion for Citi preferred stock, on top of the $25 billion it has already given the bank. But this time, the government also said it will assume 90% of losses from Citi's $306 billion portfolio of loans related to bad mortgages if the losses exceed $29 billion, in return for another $7 billion in Citi preferred stock.

The news boosted Citi shares 58% to $5.95, helped lift other battered financial stocks and triggered a broad market rally Monday in which the Dow Jones industrials surged 397 points to 8443.

NEW YORK — The latest bailout of Citigroup (C) helped soothe financial markets Monday and could serve as a model for other U.S. banks looking for help with their large portfolios of toxic assets.

The U.S. government late Sunday offered $20 billion for Citi preferred stock, on top of the $25 billion it has already given the bank. But this time, the government also said it will assume 90% of losses from Citi's $306 billion portfolio of loans related to bad mortgages if the losses exceed $29 billion, in return for another $7 billion in Citi preferred stock.

The news boosted Citi shares 58% to $5.95, helped lift other battered financial stocks and triggered a broad market rally Monday in which the Dow Jones industrials surged 397 points to 8443.

Analysts say the backstop was essential to calm investors worried that the values of U.S. bank portfolios have been getting worse each passing month. "Persistent downward pressure on valuations of residential mortgage assets are being compounded by falling valuations of commercial real estate and other assets," says Brian Bethune at IHS Global Insight.

Any bank with similar toxic assets in their portfolio now has a chance to ask the government for similar cover. "Bank of America (BAC) can use this template to reduce the risk on Merrill's (MER) portfolio before they close the deal," says Cassandra Toroian, chief investment officer at Bell Rock Capital. BofA declined comment.

For the government, this is a way to stretch the fast-dwindling cash available from the $700 billion bailout fund. "It enables the government to leverage taxpayers' money better," says Keith Davis, financial analyst at Farr Miller & Washington. "This way, you can avoid buying up bad assets, and hopefully not have to bear losses unless the situation worsens."

For the banks, analysts say, this could calm investors by putting a floor on losses from the bad assets. Also, it's like an insurance policy, which the banks might never need to access, Bethune says.

This marked another reversal for the government, which two weeks ago said it would not take any action related to toxic assets, as it had planned, and instead would invest directly in the banks. That news sent financial stocks tumbling. Citi was especially hard hit, falling 60% to $3.77 last week, prompting the bank to ask for more federal help. Now, "If the investors start to go after Goldman (Sachs) (GS) or Morgan Stanley, (MS) you can see them, too, ask for similar government guarantees," Davis says. Goldman and Morgan declined comment.

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Citi's 'slow, grudging nationalization

Image via WikipediaCan Citigroup survive? - Nov. 24, 2008: "Citi's 'slow, grudging nationalization'

Monday's massive rescue package hasn't solved Citigroup's problems, says bank analyst Christopher Whalen.

(from Fortune Magazine) -- In just a few days Citigroup went from trouble to trauma as its stock price plunged amid sweeping layoffs and deep losses on some of its more esoteric assets. When news reports swirled that the megabank was considering a sale of part or all of the company, it was clear that Citi was singing from the same hymnbook as firms like Lehman Brothers, Wachovia and AIG had before they fell. The public's only question: What would the end game look like?

Now we have our answer - a government agreement to shoulder hundreds of billions of dollars in possible losses and inject billions of dollars into the bank. FORTUNE checked in with bank analyst Christopher Whalen, co-founder of Institutional Risk Analytics and a prescient critic of Citigroup (C, Fortune 500) since 2003, when he said its riskier, higher-return strategy made it more vulnerable than its banking peers.

Here are some excerpts. This one is well worth a read of the full article.

Fortune:

Does this plan solve Citi's problems?

Whalen: This does nothing more than temper the problem, but, no, it hasn't solved anything.

Fortune:

How does this rescue plan differ from the other bailouts we've seen in the past few months?

Whalen: The accurate term for what the government has done is "open bank assistance." It's similar to what the FDIC had to do when it was clear that Wachovia could no longer go on, except there is not a ready buyer in this case. The other big financial institutions have had parties willing to pick up the assets, but you won't see that with Citi. This bailout is more like a resolution. That means that the government essentially has to take control of Citicorp and become more and more involved with its operations until the bank ultimately is nationalized.

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U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit

Image by imageining via FlickrBloomberg.com: Exclusive: Nov. 24 -- "The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis."

The important thing to note at this time is that the $700B TARP bailout is just the tip of the iceberg. Keep an eye on this story updates. The writers, Bloomberg's Mark Pittman and Bob Ivry, seem to have a good feel for these complex issues.

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Bloomberg.com: Economy

Bloomberg.com: Economy: "The Treasury's stock buying program will begin with nine banks, which it didn't name. People briefed on the matter said $125 billion will be disbursed in days: Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co. and a combined Bank of America Corp./Merrill Lynch & Co. each will get $25 billion, while Morgan Stanley and Goldman Sachs Group Inc. will get $10 billion each. Bank of New York Mellon Corp. said it will receive about $3 billion and State Street Corp. said it's getting $2 billion."

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Worst crisis in 50 years?

"This is the worst crisis I've seen in my 50-year career,'' William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington yesterday. "We still have to deal with the effects on the real economy here and elsewhere.''

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• Money Bags!

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Banks for McClatchy, owner of the Miami Herald, demanded as much as 2.25 percentage points more in annual interest to relax the publisher's lending agreements, the Sacramento, California- based company said in a Sept. 30 regulatory filing. McClatchy was paying an interest margin of 1.25 percentage points at the start of the year. San Francisco-based construction-supplier Building Materials agreed last week to pay an extra 3.5 percentage points on $340 million of loans after its earnings fell below targets, according to a Sept. 30 filing.

``We're in a credit crunch and getting those covenants amended will be lot more painful,'' said Andrew Feltus, who oversees $8 billion in high-yield debt at Pioneer Investment Management Co. Inc. in Boston.

Debt rated below Baa3 by Moody's and less than BBB- at S&P is considered junk, or in the case of loans, leveraged. Loans are typically made by banks such as Citigroup Inc. and JPMorgan Chase & Co., which then sell pieces to mutual funds, hedge funds and other institutional investors.

The market for leveraged loans ballooned as banks arranged $956 billion of the debt in the first half of 2007, compared with $549 billion in 2005 as banks raced to finance the record amount of buyouts. The market ground to a halt a year ago as the subprime mortgage contagion spread, making investors"

Bloomberg.com: U.S.

Bloomberg.com: U.S.: "Wachovia CEO Robert Steel, 57, stands to benefit from any improvement in bids for Wachovia. Recruited from the Treasury department in July to rebuild the lender's credibility with investors, he bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Wells Fargo's bid won endorsement from stakeholders including Davis Selected Advisers LP, the Dodge & Cox mutual fund group and the Sandler family, according to a statement. The Sandlers sold Golden West Financial Corp. to Wachovia in 2006 for about $24 billion, when Wachovia was run by CEO Kennedy Thompson. The unit's option ARM home loans have since been blamed for contributing to Wachovia's record quarterly losses and Thompson lost his job."

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Oct. 3 (Bloomberg) -- When Sheila Bair took over as head of the U.S. Federal Deposit Insurance Corp. in 2006, the agency was probably better known for the ``FDIC'' logo on the doors of the nation's banks than for anything it did.

Now Bair is at the center of the financial crisis, speeding the takeover of failing banks and pressing the mortgage industry to ease loan terms. And she's vaulted from the leadership of a once-sleepy regulator into the league of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, winning praise from Democrats and Republicans.

``She has more power because of the situation on the ground,'' said Senator Charles Schumer, a New York Democrat. ``No one is going to put handcuffs on her.''

``She's going to be Treasury secretary someday,'' said Tim Adams, a former department undersecretary under President George W. Bush who worked with Bair when she was an assistant secretary.

In just the last week, Bair, 54, invoked never-before-used authority to avert a financial-system breakdown by brokering a deal for Citigroup Inc.'s to buy Wachovia Corp.'s banking operations. She seized Washington Mutual Inc. and sold it to JPMorgan Chase & Co. and convinced the Senate to temporarily increase the FDIC's insurance of individual bank deposits -- a move Paulson opposed."

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Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "`Destroyed the Market'

To be sure, she has angered investors. Some Wachovia shareholders blame her for wiping them out when she helped engineer the sale and warn that other banks will suffer for it.

``That destroyed the market,'' said Peter Kovalski, senior portfolio manager at Alpine Woods Capital Investors LLC. ``Taking over a healthy, well-capitalized bank, the way they did, now investors are not going to be willing to invest in any bank.''"