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Citigroup Bailout Details: Treasury Secretary Geithner Offers The Shaft To The Sheeple

We are covering this as a rolling story. Links and commentary will be added all day. To keep from clogging the front page, all links and updates are after the jump.

The Citigroup deal is done and the details have been released. It's the Spanish Inquisition all over again as taxpayers are getting the rack, the rope and the shaft. Based on where Citi's stock is trading currently, taxpayers will be paying a 100% premium to convert preferred shares into common. Geithner and Pandit agreed to a conversion price of $3.25 per common share. Citi's stock is down 30% on the news and trading at $1.75 currently. First, the official press release from Citigroup.


It's more lemon socialism. The banks get the upside and and the taxpayers the shaft. The obvious question though is why would any of the existing pereferred holders convert at $3.25 when the common is trading at $1.75 this morning. Henry Blodget wonders the same thing.


For clarification, as it was struck last night, the deal does NOT yet involve any new taxpayer funds. It is simply an agreement and formula for converting our existing preferred shares into common in order to boost tangible common equity (TCE) at Citigroup. Though still not completely clear, it seems the rub of the deal is that Geithner has agreed that taxpayers will convert up to $25 billion of our preferreds into common ONLY if matched in conversion by private holders of the preferreds. And so we ask again, where is the incentive for existing private holders of the preferreds to convert at $3.25, when the common is 50% below tht price currently? Here's a snip from the Wall Street Journal this morning on the proposed deal:

"Under the deal, Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock. The exchange, if fully executed, would leave the U.S. government with 36% of the bank's shares. Existing shareholders' stake would be cut to 26%. Shareholders will have to approve much of the common stock issuance."


Here's another snip from the same WSJ article that gets to the crux of the deal:

"It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said. The Treasury Department will match the private investors’ conversions dollar-for-dollar. That accounts for uncertainty in how big the government’s stake will be."

"The terms are onerous for both sides. While common shareholders will see their stakes severely diminished, preferred shareholders are being asked to swap their holdings for riskier common stock, whose holders are the first to get wiped out in times of trouble.

Neither has much choice, however. To motivate investors to sign up, Citigroup is suspending its payment of dividends on preferred stock. And to spur common shareholders to vote for the deal, Citigroup will issue securities to preferred shareholders that agree to the swap that let them buy common stock for a penny a share if shareholders don't approve the deal."


Here's what Bloomberg has to say on the deal:



GE just dropped a bomb on the markets.



If you haven't seen it yet here is Option Armageddon on leverage ratios of all the big banks. GE is included of course. Their ratio is 140:1. Ouch.



The best rating firm out there Egan-Jones said this morning that Bank of America will be next.



Must read on the terms of the deal plus a primer on convertible preferreds.



4:25 PM The market is closed. Citigroup finished the day at $1.50 per share so taxpayers lost approximately $14 billion on the new Citi deal. Here's how the numbers go. We had $25 billion in preferred shares which we converted (or will be converting) into common shares at the price of $3.25 per share. Thse shares are now worth $1.50 so we have lost $14 billion of our $25 billion in one day, theoretically.

The entire question leading up to this announcement was how much preferred holders would be asked to pay for their new common shares. This entire charade was merely a clever ruse for Geithner to give $25 billion of your kid's cash straight to Citigroup.  Citi's common shares will soon be worthless as will the entire original $25 billion investment.

PLEASE CALL THE US TREASURY and tell them how you feel.   202-622-2960   USTreas.gov



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Reader Comments (14)

I hate you Pandit and Bob Rubin! You are stealing our kids future.
Feb 27, 2009 at 12:41 PM | Unregistered CommenterSanta Monica Monster
Citi stock price is now at $1.50. I have lost 90% of my retirement money in Citi.
Feb 27, 2009 at 12:54 PM | Unregistered CommenterC Investor
The market doesn't seem to like the deal for C shareholders. Understatement of the day.
Feb 27, 2009 at 12:56 PM | Unregistered CommenterTenerife
This was linked from Yahoo. Nice photo. Bob Rubin must be punished.
Feb 27, 2009 at 12:59 PM | Unregistered CommenterShitty Poop
This is my favorite part of the story. I'm so glad that the arrogant Saudi prince is taking a bath on his C shares. Loves it.
Feb 27, 2009 at 1:02 PM | Unregistered CommenterPrince Alwaeed Lost All His Money
GE just announced they are cutting dividend to .10 per quarter from .31. This will be bad for the markets. i guess we are going to have a major crash this Monday:(
Feb 27, 2009 at 1:39 PM | Unregistered CommenterSanta Monica Monster
But, let's not forget that - as all REAL Americans know - for every dollary Citi gets "those people" aren't getting it. And THAT makes all REAL Americans much happier.
Feb 27, 2009 at 1:41 PM | Unregistered CommenterA REAL American
"Though still not completely clear, it seems the rub of the deal is that Geithner has agreed that taxpayers will convert up to $25 billion of our preferreds into common ONLY if matched in conversion by private holders of the preferreds."

This better be true or all is lost. I am highly skeptical as no rational private holder would agree to such a conversion. Any that would belongs in a padded room at a psychiatric hospital. We just flushed $25bn down the toilet folks. Is this really a surprise?
Feb 27, 2009 at 1:54 PM | Unregistered Commenterspideydouble
That smile on his face is dirty. I would not want this guy to run my bank. What a sad situation.
Feb 27, 2009 at 3:35 PM | Unregistered CommenterBoston Celtics
Bob Rubin and Sandy Weil are more to blame than Pandit. But he deserves the heat nonetheless for not being aggressive last fall when the dam first broke.
Feb 27, 2009 at 4:35 PM | Registered CommenterDailyBail
Does anyone have any word whether any conversion has taken place? Color me a skeptic that any SWFs converrt.
Feb 27, 2009 at 5:24 PM | Unregistered CommenterDubai In The Sky
@Dubai in the Sky

No conversion yet.
Feb 27, 2009 at 5:27 PM | Unregistered CommenterPencil_Pusha
The volume was incredible at almost 2bn yet it barely budged below $1.50 until right before market close near $1.40. Someone is buying. God knows who. Maybe an alternative arrangement was made.
Feb 27, 2009 at 6:07 PM | Unregistered Commenterspideydouble
@Dubai In The Sky

From the Bloomberg article linked above:

"The Government of Singapore Investment Corp. said its stake in Citigroup will increase to 11.1 percent after it converts its preferred shares into common stock. Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among other preferred stockholders that have agreed to participate in the exchange, Citigroup said."

The key words here are "Citigroup said", but if true, this clearly means some of the SWFs are willing to play ball. Maybe the SWFs are being given some additional guarantees in backroom secret meetings and this is just high stakes three-card monte. It is going to be very interesting how this plays out.
Feb 27, 2009 at 6:15 PM | Unregistered Commenterspideydouble

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