Here’s another example of how Geithner and Summers are screwing you for their millionaire buddies.
Taxpayers are getting a raw deal in Citigroup's plan to repay its bailout funds, but you wouldn't know it from reading the news. Policymakers are emphasizing the wind-down of the unpopular Troubled Asset Relief Program, and most media outlets are doing the same. But the sloppy structuring of Citi's repayment plan is going to cost the government literally billions of dollars.
The government has two types of investments in Citi: $20 billion in the company's preferred stock, and a 34 percent stake in its common stock. Preferred stock is basically a loan that Citi has to pay back with interest, while each share of common stock gives us partial ownership of the firm. With an interest rate of 8 percent on the preferred stock, the loan is well below market rates, since the government funneled the money to Citi when it was on the verge of collapse last year, and emergency loans like that carry a very high interest rate among investors. But we do at least get paid a return on that investment.
The value of our 34 percent stake in Citi's common stock, by contrast, depends on the stock's trading price. The government bought its roughly one-third stake in February for $25 billion. On Friday, the last trading day before Citi announced plans to repay TARP, the value of that stake had risen to $30.7 billion, for a gain of $5.7 billion. That's a terrible return given the risk taxpayers were taking, but it's still a return.
On Monday, Citi said that in order to have enough money to pay off the government's $20 billion loan, it was going to raise about $20 billion by issuing more shares of common stock. The company's financial health has improved; it can raise money from the private sector and pay back the taxpayers. Sounds great, right? Wrong.
Taxpayers are getting screwed. Citi's stock market value at the end of Friday was roughly $90 billion. If Citi issues another $20 billion in common stock, the company does not magically become more valuable. It's still got the same credit card and mortgage problems it had last week, and the same shaky profit prospects. Since $20 billion is about 22 percent of $90 billion, everybody who owns a stake in Citi's common stock, including the taxpayers, will see the value of their investment decline in value by about 22 percent.
How big a deal is this? Well, 22 percent of the government's $30.7 billion stake is $6.8 billion. That means Citi's plan to "repay" the government actually ends up costing taxpayers money. Not only will our $5.7 billion profit be wiped out, but the value of our common stock investment will actually drop below what we first paid for it in February.
The government doesn't have to let Citi get away with this. The Treasury could just tell the company to keep making its regular interest payments on the $20 billion loan, and pay it off once the company has scored enough profits from its ordinary banking activities. That would take time, but by footing the bill for the loan with profits, rather than through new investors, Citi could pay back one taxpayer investment without destroying the other one. But there are no indications that policymakers are taking the taxpayers' interest seriously--instead, negotiations have centered around how much money Citi must raise from the private sector to qualify as healthy enough to exit TARP.
Why is Citi in such a hurry to pay back its loan? It wants to be able to offer executives bigger bonuses. When Citi pays back TARP, it will no longer be subject to pay czar Ken Feinberg's executive compensation restrictions...
Inserted from <The Nation>
To simplify this Geithner could easily tell Citi’s banksters to back off and pay the TARP when they can afford to do so out of profits. He is not doing so. Therefore instead of making a profit of 5.7 billion, we the taxpayers will take a $1.1 billion loss. In addition, their stockholders, including pensions, IRA, etc., will take a $19.8 loss due ton the decrease in value of their stock. And the banksters? They get to go back to giving themselves obscenely fat bonuses. Why isn’t Geithner stopping this? Why isn’t Summers advising Obama to order Geithner to stop this? They care for their Wall Street cronies and don’t give a damn about Main Street.
Obama needs to fire Geithner and Summers.
7 comments:
citi is insolvent; they are only staying afloat as the result of accounting rules changes that allow them to keep their SIVs off the books, and to create a balance sheet that makes their worthless paper saleable: Citigroup ‘Lottery Ticket’ May Pay U.S. Lowest Return (Bloomberg) -- Warrants the U.S. holds in Citigroup Inc., once the most valuable bank in the nation, may provide the lowest return for taxpayers who stepped in with $45 billion to save the company when no one else would. The Treasury Department, which delayed plans to sell Citigroup shares after a Dec. 16 offering priced them below what the agency paid, may get no more than $179.3 million for the warrants, based on estimates from Nomura Securities International Inc. Goldman Sachs Group Inc. paid $1.1 billion to buy back warrants, and JPMorgan Chase & Co.’s netted $936.1 million. Both banks received less federal money than Citigroup. The value of the 465 million Citigroup warrants may depend on whether buyers think the stock can quintuple from its current price. Almost half the warrants, which convey the right to exchange them for common stock at $17.85 a share, will be worth converting only if Citigroup gains 425 percent by October 2018 and attains a market value of more than half a trillion dollars, a level no U.S. bank has ever achieved.
4.22 Citi Shares For Each Person in the World - A comment on Zero Hedge today offered up an interesting stat -- that there are 4 shares of Citigroup for each person on the planet. Wow. We looked at all US stocks and found that Citi has by far the most shares per person on the planet. With 28,260,770,000 shares outstanding and 6,692,030,277 people in the world in 2008, the Citi shares/person ratio is 4.22.
TC - between you and rjs, I'm like so bummed! LOL yeah, it's friggin incredible what is going on with the banking .... It's a real 'coal' christmas for Americans.
Oh but Tom I suppose you didn't find the article that related that all of the banks that are conducting TARP paybacks are charging 2-5% in handling and transaction fees for returning the tax payer money to the government.
All nice and legal, I mean someone has to actually do the paper work and push the send button but then those transactions are being listed as simply transactions in the course of business and added as "profitable" thereby adding to the bonuses of them who get them because the business showed and extra 25-50 billion or so in profitable transactions.
We shoulda been better at arithmetic I say.
rjs,TC or anyone-all joking aside,is there a term for what the govt is doing by bailing out the banks but allowing them to still conduct their own operations?
not socialism like some say,the govt takes no part in policy (IMO bonus restriction doesn't apply).Not mercantilism.
I can describe it but don't know if there is a term which applies.
OSO: welfare!
rjs,
Nope that's just for Black and Brown people !
RJ, that's amazing!
Gwen, I don't want you to get bummed. I want you to get indignant enough to harass your legislators like a hound from hell.
Mark, you are correct. Had I seen it, I would have posted it. Grrr!
Oso, there are many terms that could apply. Crony capitalism is descriptive but it does not convey the extent of the corruption. Plutocratic fascism is accurate, but usually misunderstood, because most don't understand that fascism in its simplest terms is authoritarian government with strong business influence and no access for the common people except as a member of a group. My favorite is socialism for the rich; free enterprise for the poor.
LOL, you two!!
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