Flying Pink Unicorns

Citigroup rescue


Ho hum. Another day, another historic, enormously complex and expensive financial rescue, this time of Citigroup, the most important company in the world to the US economy, oil companies excepted.

I've always thought, since I was 18, that the failure of a big bank could unleash the 4 Horsemen of the Apocalypse, as the other financial institutions they owe money to (called counterparties in the jargon) suffer from not receiving monies owed from the big failing bank. After all, if Citigroup owes Bank of America $500 million because of the expiration of a derivative contract, or because it borrowed that much money to meet reserve requirements, Bank of America can absorb that loss. But a medium sized bank would be pushed to the wall. The knock on effects when that medium sized bank can't meet its obligations, coupled with the grave uncertainty that would ripple through the financial system (worse than what's going on now, believe you me) would be devastating.

Citigroup had "more than $2 trillion in assets as of the end of the third quarter and has operations in more than 100 countries."

http://money.cnn.com/2008/11/23/news/companies/citigroup/index.htm?postversion=2008112400

Whats' more, Citigroup is widely rumored to have more than $1.2 trillion of assets off of its balance sheet.

Let's run that again. Citi has assets equal to something on the close order of 20% of the entire national debt, not counting the off-balance sheet assets! In fact, I just checked, and according to one website, the national debt is 10.6 trillion. http://www.brillig.com/debt_clock/ I just checked the Treasury Department's website, this number is correct.

Anyway, the government clearly and wisely agrees that Citi is too big to fail, and announced a massive rescue package. Here are the particulars:

1) The US Treasury and the FDIC will backstop losses against more than $300 billion in troubled assets.

2) Treasury will make an additional $20 billion investment in Citi, on top of the $25 billion it already invested as part of the $700 billion bailout passed in October. So a total of an insane $45 billion has been invested into one private company. Far more may yet arrive.

The government is receiving preferred shares as compensation. $20 billion for its direct investment, and $7 billion as compensation for guaranteeing more than $300 billion in troubled loans.

According to money.cnn.com, Citi itself is on the hook for the first $29 billion in losses on the covered assets, including "mostly loans backed by residential and commercial mortgages." Citi is responsible for 10% of losses above that amount, with the government shouldering the rest of the losses. So Citi is still on the hook for potentially huge money, but the government is taking 90% of the risk. I wonder what the estimated total loss is on these loans.

In terms of the scale of the bad debts/troubled assets, According to the Wall Street Journal, Citigroup and the government have identified a pool of about $306 billion in troubled assets."

http://online.wsj.com/article/SB122747680752551447.html

I know there would be a wide range of uncertainty, but I would like to know whether we are expecting, as of now, for the government to shell out $5 billion (*yawn*) or $100 billion (OH MY GOD)?

In any event, as you can tell from my earlier comments, Citi simply cannot be allowed to fail, whatever the costs! I am not in a position to say whether I support the specifics of the investment/bailout announced, but I support the general principle.

We are living in the most dangerous economic times since 1945, by far. By FAR. Let's hope Bernanke and Paulson can keep the wheels on until the adults take over on January 20th. Where have you gone Robert Rubin, Larry Summers, etc.