There are a lot of parallels between the deal unveiled overnight to restore confidence in Citigroup and the terms of the FDIC-arranged merger with Wachovia from September that never went through. A big pool of assets (now $306 billion, then $312 billion) is set aside, Citi agrees to take the hit on the first few billion (now $29 billion, then $42 billion) in losses, and the government takes most or all (now 90%, then 100%) of the rest. In exchange, the government gets a stake in Citi (now $7 billion in preferred stock, then $12 billion).
The difference is that all those guarantees before were supposedly to protect against bad Wachovia loans, whereas now it’s Citi’s assets that need insuring. But some have been speculating for a while that Citi-Wachovia was actually intended as a stealth bailout of Citi. Now we’re getting a non-stealth version.
Now I’m all in favor of less stealth and more transparency. I don’t know about all this preferred stock. Citi’s market cap as of the close Friday was $20.5 billion. As part of this new deal the feds injected another $20 billion in capital into Citi (on top of the $25 billion already put in as part of the first round of TARP/BARF injections) in exchange for yet more preferred shares. Shouldn’t we taxpayers just own the whole company by now?