Citi Jumps Into Bed With the Government, Again

Citgroup has taken $45 billion from the government's Troubled Asset Relief Program, and in November won a federal bailout that will limit losses on $306 billion of toxic assets. WSJ points out in an editorial this isn't enough for Citi. They are jumping in bed with government to stfle their competitors. WSJ with the details:

After years of resisting, Citi has suddenly signed off on Senator Dick Durbin's plan to allow judges to rewrite mortgage contracts for borrowers in Chapter 13 bankruptcy. Under the Illinois Democrat's plan, which is earmarked for inclusion in the pending stimulus bill, judges could reduce the amount of principal, lower the interest rate, and change the length of the mortgage term.

Until Washington embraced the politics of housing panic, even sensible Democrats recognized that allowing such mortgage "cramdowns" was a terrible idea, sure to punish future borrowers with higher rates as lenders calculate the increased risk...

Citigroup may support this plan precisely because it isn't a big player in the mortgage market. Sure, it has some dodgy mortgage-backed securities on its books, but they've been written down and the feds cover 90% of losses beyond $29 billion in any case. When it comes to making loans, however, Citi originates less than 10% of American mortgages.

Citi is falling further behind J.P. Morgan Chase, which acquired Washington Mutual; Wells Fargo, which acquired Wachovia; and Bank of America, which bought Countrywide. J.P. Morgan's mortgage business is now twice the size of Citi's, while Wells and BofA each originate almost three times as much dollar volume as Citi. So in agreeing to Mr. Durbin's offer, Citi is also volunteering its competitors to write down more mortgages, giving Citi a comparative advantage.

Big Banks Get $125* Billion Cash Going Away Gift From Paulson and the Bush Administration

Please sit down before you read this. If you have high blood pressure or heart trouble don't even try to read this, find a decent sports page instead, this is not for you.

Approximately half of the first $250 billion tranche of money approved by Congress for the mortgage crisis will end up in the hands of the "healthy" big banks.

"For the good of the American financial system," Treasury Secretary Paulson has told the big banks they must take his $125 billion (Give or take a billion or two) handout, reports NYT.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch. So much for bailing out the mortgage market.


Here's the kicker: The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. In other words, all current shareholders are protected, unlike Lehman, Bear Stearns, Fannie Mae and Freddie Mac shareholders.

No matter how they frame this,the truth is this is a roughly $125 Billion going away gift from the Bush Administration to Wall Streets elite.

UPDATE: The exact terms of the funding have been released by Treasury. For the first five years, the dividend on the preferred stock will be only 5%, not 10%. The full terms on the funding can be found here.

*Note I initially put the headline handout number, and number in the story, at $135 billion. The handout number is a bit unclear, so to be conservative I have lowered the total handout estimate to $125 billion

Pigs At The Trough: Behind The Citigroup, Wachovia, Wells Fargo Circus

First a very quick summary of what has been going on.

Early last week, the FDIC forced the hand of Wachovia and pushed them to be taken over by Citigroup. It was a typical FDIC sweetheart deal. This time for Citi. Citi paid $1 a share, or about $2.2 billion.

The government agreed to provide Citigroup with a financial guarantee on Wachovia’s most risky assets. It is similar to the deal that the Federal Reserve established with JPMorgan Chase’s emergency takeover of Bear Stearns.

Then later in the week, Wells Fargo recognizing that Wachovia was worth a lot more than $2.2 billion, especially because of some tax law changes made by Paulson's Treasury, bid, get this, $15.4 billion WITHOUT any government protection against risky assets.

Now,the courts will decide who gets Whacovia

So what is going on with all this aggressiveness to buy a bank in trouble?

Paulson's Treasury is writing regulations that will benefit firms like his old firm Goldman Sachs. It just so happened that this rule change was made last week Tuesday and Wells Fargo decided to try and steal Wachovia from the grips of Citigroup and its sweetheart deal. A signed agreement between Citi and Wachovia be damned.

What's the Treasury rule change that caused all this commotion? Specifically, companies are allowed to shelter profits from taxation based on their past losses. When a profitable company buys a company with losses, however, the government historically has limited the profitable company's ability to shelter its income based on the acquired company's losses. In the case of Wells Fargo, the company could only have sheltered about $1 billion in income each year --for a total of $20 million over the 20 year life span of tax loss carry forwards..

But the Treasury last week Tuesday changed the rules and removed the limits on the income banks can shelter based on the losses of acquired companies. In announcing its deal for Wachovia, Wells Fargo estimates it could write down $74 billion in losses on Wachovia's loan portfolio. Absorb that: Instead of $1 billion in tax sheltered income per year under the old rules, the new rules will allow $74 billion in sheltered income in any time period.

So basically, you have the government throwing so many goodies at the elite players that are left standing, like Citi and Wells Fargo, that they are fighting over who gets the goodies. Will it be Citi with its FDIC sanctioned low ball bid of $2.2 billion and the financial guarantee by the government against losses on Wachovia’s most risky assets, or will it be Wells Fargo and the super sized increase in value of Wachovia's tax loss carry forwards of $74 billion.

Either way, it is a heist.

Citi and Wells Fargo are pigs at the trough of multi-billion dollar gifts from the government under the cover of the overall financial crisis.

You can be certain there are all sorts of these hidden deals tucked inside the 400 plus page Paulson Plan and other rules being changed by government agencies because of the crisis. Most of them are hidden and unknown to the general public. The story was broken by WaPo on the tax benefit change only because of Wells Fargo's aggressive bid for Wachovia, and thus focus on the deal.

But, keep in mind that Goldman Sachs (Paulson's old firm) just became a bank holding company that is expected to be making very aggressive acquistions in the banking industry. Thus, Paulson's change in banking tax law will likely benefit Goldman to the tune of billions upon billions in tax benefits--especially since Paulson's phony bailout will require mortgage securities to be sold at depressed market values, which will producee greater tax loss carry forwards for Goldman from the banks they acquire.

So it doesn't matter how the court rules, whether in favor of Citi or Wells Fargo. The fix is in, with major benefits handed out by the government to whichever pig wins.

Given the billions involved, let's hope they at least pay for their own lipstick.

UPDATE: Forgot to mention, the new CEO at Wachova is Robert Steel, a former Treasury AND Goldman man. Cozy.

Analyst: More Downside Pain for Bank Stocks

Mark Hanson, a mortgage consultant with the Field Check Group, who is used by top hedge-fund clients, is negative on a slew of financial stocks.

Stocks he has recently suggested betting against are Lehman Brothers, Wells Fargo, Wachovia, US Bank, PNC Bank, H&R Block and Assured Guaranty, according to NyPo.

Top Analyst Expects Final Drop In Housing Prices To Be Over 33%

Oppenheimer & Co.'s Meredith Whitney, the analyst who, very early in the game, correctly predicted Citigroup would reduce its dividend, even when Citigroup denied that it would, said in an interview on Bloomberg Television with Carol Massar, that the housing decline will continue and that it won't be over until house prices drop more than 33% from thier peak levels.

Whitney has also downgraded Wachovia Corp and said the earnings outlook for Wachovia. has ``dramatically diminished''. She also said that she remains negative on Citigroup, Wells Fargo and Bank of America. She said she is particularly concerned about Wells Fargo since it even fails to disclose the data that would make it possible to understand its true financial position.

Whitney said that Wachovia appears to be trying to shrink its balance sheet and that "historically, financials have not shrunk well.'' She said Wachovia last week released charge-off figures that didn't correspond with portfolio values, meaning the bank might be shrinking its balance sheet. ``Your revenues go down dramatically. Effectively, you'd be eroding capital,'' said Whitney.