CITIGROUP BAILOUT: It's Up To $306 Billion in Guarantees Plus Equity Infusion

The United States government will guarantee up to $306 billion of Citigroup assets, as part of a major bailout of Citi.

In addition, Citi will receive a capital injection of $20 billion. As part of the capital injection, the U.S. government will receive warrants exercisable at $10.61 on 254 million shares. Given the stock closed Friday at $3.77, this is a non-dilutive deal on a per share price basis for Citi shareholders.

THIS IS THE FIRST DEAL DONE BY THE GOVERNMENT WHERE SHAREHOLDERS HAVE NOT BEEN FORCED TO TAKE HUGE HITS ON THEIR STOCK POSITIONS. Freddie and Fannie shareholders are likely to lose everything. Lehman Brothers is in bankruptcy and Bear Stearns shareholders received less than 50% of the closing price on the last day Bear Stearns traded before the government rescue. In this deal, if the warrants are exercised, the government will pay more than 280% above the closing price on Friday.

It pays to be the Robert Rubin wing of Goldman Sachs.

UPDATE: Unlike Freddie, Fannie, Bear and Lehman, no one at Citi in senior management will lose their jobs. Bobby R. has their back.

Citi Rescue Coming

Details remain hazy, however, I remain convinced that there will be no significant dilution of Citi stock. Which means it won't be like the Bear Stearns rescue or the Lehman Brothers collapse or the Freddie and Fannie rescues.

NYT says as much in its report on the developing rescue:

If approved, the plan could serve as a model for other banks, heralding another shift in the government’s morphing financial rescue.

Tim Geither In Profile

According to various news sources, Tim Geithner will be nominated as Treasury Secretary by Barack Obama. An official announcement is expected Monday.

Judging by his actions it does not appear Giethner believes in free markets. For him, the government needs to stand by with buckets and buckets of money.

According to reports, in 1997 he was instrumental in pushing then Treasury Secretary Rubin to OK a bailout of South Korea.

Geithner also was reportedly behind the $29 billion guarantee against losses that the Fed made to JP Morgan when JPM purchased Bear Stearns. The guarantees against losses, it should be noted was in addition to the fact that JPM stole Bear Stearns at a huge discount from its liquidation value.

His interventionist credentials are pretty well established on Wall Street. Here's Larry Kudlow's thinking on Geithner ans the next tranche of the $700 Billion Paulson boondoggle:

As for the TARP bailout story, it is generally believed that Geithner is a strong interventionist. And so we can expect him to move toward raising the second $350 billion tranche of the originally authorized $700 billion package by Congress

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Geithner graduated from Dartmouth College with a bachelor’s degree in government and Asian studies in 1983 and from the Johns Hopkins School of Advanced International Studies with a master’s in International Economics and East Asian Studies in 1985, according to his official bio on the New York Fed site.

He joined the Treasury in 1988 and worked in three administrations, serving as Under Secretary of the Treasury for International Affairs from 1999 to 2001 under Treasury Secretaries Robert Rubin and Larry Summers.

He also worked for Kissinger Associates for three years.

He become New York Fed president in 2003. In that capacity, he worked as the vice chairman and a permanent member of the Federal Open Market Committee, the group responsible for formulating the nation's monetary policy.

One side note. Geithner graduated from the International School of Bangkok, Thailand. His father appears to be a possible CIA agent and is listed by the New York Times as the "program officer in charge of developing countries for the Ford Foundation."

Geithner falls under the Robert Rubin wing of Goldman Sachs influence, as he worked for Rubin when Rubin was Treasury Secretary.Geithner also serves as chairman of the G-10’s Committee on Payment and Settlement Systems of the Bank for International Settlements. He is a member of the Council on Foreign Relations and the Group of Thirty.

But it is his interventionist bent that could prove we have a major inflationist at Treasury. One Obama confident relates a recent conversation between an associate and a Fed official, in which the latter complained, "Christ, Geithner wants to save everybody."

More money hand outs to Wall Street, no wonder the market jumped 500 points on news of the Geithner selection.

On CEO's Whining About Short Sellers:

"You have to wonder if this helps or hurts investor confidence. When executives keep blaming shorts, it just shows they aren't taking the challenges to their company seriously. And it certainly implies they aren't planning any management shake-up."
-John Carney

From personal experience,I would say 95% of the CEO's, who have complained to me about short sellers, just didn't understand markets, trading patterns and how market makers operate. I think two companies that do have legitimate complaints are Bear Stearns and Lehman Brothers.

The Transfer of Risk to Idiot Shareholders...and Then To Taxpayers

Michael Lewis, author of Liar's Poker, explains (ViaMP):

John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.)

He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders.

But it made fantastic sense for the investment bankers. From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government . “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

Obviously, the government shouldn't be in the game. The shareholders at Goldman Sachs and Morgan Stanley should have been allowed to fail just like Bear Stearns and Lehman Brothers shareholders. Burned shareholers wouldn't be investing in investment banks again any time soon, and new financially grounded partnerships would rise from the ashes.

The Duffle Bag March

Paul Krugman highlights this from a Reuters report:

OK, this is weird:

At Lehman’s headquarters in midtown Manhattan, employees were coming and going throughout the day.

Some entered with what looked like empty duffel bags and gym bags and emerged an hour or so later with full bags

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During the weekend of the Bear Stearns collapse, I was outside Bear Stearns headquarters and the same thing occurred there. It's brokers and traders fearing that they will be locked out of their offices, so they grab their client books and list of trading positions, so that when they move on to a new firm they have contact and portfolio information immediately at hand.

I'm not sure this isn't breaking some kind of NASDAQ or SEC regulation, but it is being done in full view of the regulators, especially in the Bear case, since SEC officials were part of the group meeting with Bears Stearns in the same offices!!

There are some individual brokers that have a long standing habit of putting erroneous phone numbers (or at least the worst number to reach a client at) on computer data, so that if they ever leave, it will be difficult for the old broker's firm to easily contact the client, while the broker sets operations at a new firm and transfers the client account over. It's the hand written contact info in the black books that are being hauled out that has the important contact info.  

-Robert Wenzel

The Balance Sheet Basics of Companies in Crisis

Below are balance sheet basics of companies in crisis, based on their SEC filings. It is likely assets are overstated, but this will give you a good size comparison of the companies who are in or were in crisis:

Bear Stearns had $399 billion in assets and $387 billion in liabilities. They were counterparty to $1.25 trillion in derivatives trades.

Lehman Brothers has $640 billion in assets and $613 billion in liabilities.They are counterparty to $729 billion in derivatives trades.

Merrill Lynch has $966 billion in assets and $931 billion in liabilities. They are counterparty to $4.2 trillion in derivatives trades.

AIG has $1.0 trillion in assets and $972 billion in liabilities. They are counterparty to $447 billion in credit default swaps.

-EPJ Newsdesk

The LTCM Meeting Versus The Lehman Meeting

When Long Term Capital Management was collapsing the New York Fed held an emergency meeting similar to the meeting held yesterday evening regarding Lehman Bros.

The LTCM meeting was held on September 22, 1998. It is instructive to review who was at that meeting, almost 10 years to the day of the emergency Lehman meeting:

Bankers Trust, Barclays, Bear Stearns, Chase, Credit Suisse First Boston, Deutsche Bank, Lehman Brothers, Morgan Stanley, Credit Agricole, Banque Paribas, Salomon Smith Barney, Societe Generale, Merrill Lynch, Goldman Sachs, UBS and JPMorgan

Of this group, Bear Stearns is gone, Lehman will be buried on Sunday and Merrill Lynch is on the edge. The only other independent investment banks still standing are Goldman Sacks and Morgan Stanley.

This needs to be re-stated. If Merrill goes down, the only remaining significant(that the NY Fed calls to emergency meetings) independent investment banks will be Goldman Sachs and Morgan Stanley.

Maybe its time to re-read my Does Goldman Sachs Run The World? column.

-Robert Wenzel

As The World Crashes....

Bear Stearns..Gone.

Fannie Mae...Government hearse has arrived.

Freddie Mac...Government hearse has arrived.

Lehman Brothers....A priest has been called.

Washington Mutual...On life support.

Wachovia...Alarm buzzer in Emergency Room is screeching.

AIG...Being rushed to hospital.

Merrill Lynch...High fever.

Goldman Sachs (Where Henry Paulson was Chairman and CEO before heading the Treasury).....Today's closing price: $153.47 per share.

-Robert Wenzel

Is Goldman Sachs Behind Rumors About Lehman Bros.?

Apparently, Lehman's CEO Richard Fuld Jr. think's so.

Fuld called Treasury Secretary Hank Paulson's old firm in June, according to WSJ:

Mr. Fuld grew increasingly frustrated about chatter over Lehman's future and rumors that counterparties were shying away from trading with the firm. At one point, Mr. Fuld contacted Goldman Sachs Group Inc. CEO Lloyd Blankfein. "You're not going to like this conversation," Mr. Fuld told Mr. Blankfein, according to people familiar with their talk. Mr. Fuld said he was hearing "a lot of noise" about Goldman traders who were allegedly spreading negative rumors about Lehman. Goldman declined to comment.

I tell you, honest, it's all coincidence that everyone on Paulson's enemies list is getting blown out of the water: Bear Stearns, Fannie Mae, Freddie Mac, and now Lehman teetering with rumors coming out of Goldman.

It's not that Lehman doesn't have a highly leveraged problem balance sheet. It's just that almost every one on the Street and in commercial banking has the same nutty balance sheets. It's just interesting that the nutty balance sheets are causing the most problems for Paulson's enemies.

-Robert Wenzel

The Conspiracy Theory View of the Banking Crisis

J. T. Holley at Daily Speculations writes:

Sometimes I think that all these banks with brokerages attached are issuing 8%-9% preferred while simultaneously driving down their own common to be able to buy back their own stock later on the cheap and ride it back up gaining momentum until the 2013 call dates on all these preferred where they'll do secondary offerings pay off the preferred and the beat goes on! I know it ain't that simple but it sure looks like that is what is going on to me. I mean the real probability of a bank run has what been elevated from what, 2%, to 2.5% probability?

Holley has a point here, but I think it is a much more sophisticated and complex game. There is stuff going on at the individual bank level as Holley suspects, but it is a multi-level game, that at the top level includes the Treasury Secretary and the connected, such as the Carlyle Group. They are settling old scores and positioning themselves for huge profits.

Given that the mismatched short liabilities/long assets balance sheets of the entire financial industry could result in a liquidity crisis for nearly any financial institution in the United States, isn't it quite curious that the financial institutions that seem to have had, or are having, the most liquidity troubles are those that Treasury Secretary Paulson always wanted to see taken out, i.e. Bear Stearns, Freddie and Fannie?

The mortgage/housing crisis is real, but the inside players are certainly using it to set up their next big score.

Not A Chance Of A Serious SEC Investigation of the Bear Stearns Collapse

As I have written before, an insider at the CBOE told me that the government killed the CBOE's involvement in investigating who bought put options on airline stocks just prior to 9-11. Records were destroyed.

If the SEC didn't have the balls to step up to the plate and do a legitimate investigation of an attack on America, they sure as hell are not going to stick their necks out trying to take down the Wall Street establishment.

Bloomberg is featuring a story today on the semi-suspicious trading in Bear Stearns put options, and supposed investigations:

On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street's devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million...``Even if I were the most bearish man on earth, I can't imagine buying puts 50 percent below the price with just over a week to expiration,'' said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. ``It's not even on the page of rational behavior, unless you know something.''...

During the next four days, New York-based Bear Stearns unraveled in the swiftest investment-banking failure in Wall Street history. Speculation about a cash shortage proved self- fulfilling, causing customers and lenders to demand their money back. Bear Stearns's stock sank 47 percent to $30 on Friday, March 14. That's when the Fed moved to stave off a panic by helping the U.S. Treasury arrange JPMorgan Chase & Co.'s purchase of the company for $2 a share, a price unimaginable to the firm's 14,000 employees and more than 500 shareholders.

In the aftermath, Bear Stearns Chief Executive Officer Alan Schwartz told Congress that the firm was toppled by rumor- mongering and abusive trading. Regulators have begun peeling back trading records, hunting for suspects...

Evidence of any scheme to bring down Bear Stearns is most likely buried in options data...

But even further, there was an important meeting at the Fed on March 11, where Wall Street's top players were represented, except for Bear Stearns.The s#@*t really hit the fan for Bear after that meeting broke.

Eric Salzman lists the participants at that meeting and suggests questions that should be asked of them:

[S]ubpoena the following individuals and have them testify what the subject of their meeting in New York Citiy was on March 11, 2008

Ben Bernanke - Federal Reserve
Tim Geithner - NY Fed
Lloyd Blankein - Goldman Sachs
Dick Fuld - Lehman Brothers
James Gorman - Morgan Stanley
John Thain - Merrill Lynch
Robert Rubin - Citigroup
Steve Schwarzman - Blackstone
Ken Griffin - Citadel

Cox should directly ask each of these individuals;

Was Bear Stearns liquidity situation discussed?
If so, what was revealed?
If so, what action did each participants take, with regard to their relationship with Bear Stearns, immediately following the meeting?

Further, it should be asked, why wasn't Bear Stearns at the meeting?

But take a look at that list again: Ben Bernanke, Tim Geithner, Lloyd Blankein and Robert Rubin are on it, and you can be sure Hank Paulson was somewhere lurking in the background. That group against the SEC's Chris Cox. It's like Russia against South Ossetia, and Cox is South Ossetia.

Maybe, Cox nails some fall guy, but that's not even likely, maybe we will hear it was just a hedged position some trader put on to protect his other positions.

The Bear Stearns takedown was done at top, top levels. A hedge fund couldn't possibly have done it on its own. Stay tuned

Did Treasury Secretary Paulson Have a Grudge Against Bear Stearns?

Buzz has it that a book to be released soon, Bear-Trap: The Fall of Bear Stearns and the Panic of 2008, will charge that Treasury Secretary Henry Paulson had a grudge against Bear Stearns (Going bact to Long Term Capital days)and that it was an important factor behind the collapse of Bear.

The author of the book was a top level Bear exec whose name will be revealed on September 25 when the book is released.

Let The Show Trial Begin!

Billions upon billions in mortgage losses, and the Feds bust these two poor saps, Matthew Tannin and Ralph R. Cioffi--subprime fund managers at the defunct Bear Stearns....

While the real criminals, Alan Greenspan and Ben Bernanke, get away...


...and the counterfeiting, that will really take out the middle class, goes on to this day!

Last look Bernanke is printing new money (M2NSA) at a 10.0% plus rate...and you wonder why prices are climbing? When the inflation rate hits 20%, and it will, can you imagine the price collusion show trials we will have?

To the execs reading this blog, keep in mind what the show trial expert of all-time, Eliot Spitzer, said, before he got busted for his own (heh, heh) private shows:

Never write when you can talk. Never talk when you can nod. And never put anything in an e-mail.