Imagine if you will, a large freshwater sea (taxpayers) regulated by a hydro-economic dam (our gov't), fed out through pipelines (finance, banking, business, industries, etc) to destinations everywhere (goods & services sold), with a portion (although somewhat polluted) fed back into our sea. Through age, dereliction, mismanagement, greed, and myriad other degradations, the machinery begins to operate inefficiently, ineffectively & out of control.
The dam had long allowed too much outflow from the sea (taxes, credit, mortgages, loans, mergers, buyouts, et al), while the pipelines swelled and soaked up as much as the dam would let out. (When the dam & pipelines exceed our sea's supply, they "borrow" more water from neighboring seas, but put the bill on our sea's tab.) The end destinations seemed watered enough simply through the over-saturation of the pipelines. The pipelines report, "all is well", and all the machinery churned harder with gluttony. Meanwhile, the polluted portion returning to the sea increases & begins to contaminate the entire waters, and ultimately, the entire system.
Yet, the dam continues to demand outflow greater than the quality & quantity the sea is capable to feed the bloated, asthmatic pipelines. Finally, the sea begins to dry up & die...and still the dam drains the sea.
While this analogy is simplistic, it is utterly succinct. Our gov't is killing our nation with bailouts and "bad" loans to businesses. Putting a band-aid on the cancre, while the cancer eats up the body, accomplishes nothing. The worsening pain & agony of the heart, body & soul of our nation will leave no one untouched.
Make no mistake. The Day of Reckoning is soon upon us.
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Citigroup gets massive government bailout
NEW YORK (Reuters) – The government rescued Citigroup Inc, agreeing to shoulder most of the potential losses from $306 billion in its risky assets and inject $20 billion in new capital, its biggest effort yet to prevent a big bank from failing.
The bailout, announced late Sunday, gives the government the right to buy another 4.5 percent equity stake, and marks its latest effort to contain a widening financial crisis that has already brought down Bear Stearns Cos, Lehman Brothers Holdings Inc and Washington Mutual Inc.
U.S. President George W. Bush called the bailout necessary "to safeguard our financial system," and said the government would, "if need be," make similar decisions in the future.
Shares of Citigroup surged as much as 72 percent on Monday. The price of insuring Citigroup bonds against default fell by half.
"All in all, these actions should settle market jitters surrounding the company for now," CreditSights Inc analyst David Hendler wrote.
The package also gives Chief Executive Vikram Pandit more time to shed assets, slash payroll and boost efficiency after soaring losses from toxic debt led to $20.3 billion in losses in the last year. Analysts expect billion of dollars of further losses. Pandit became CEO in December.
Pandit "deserves a vote of confidence," Saudi Prince Alwaleed bin Talal, Citigroup's largest individual investor, told CNBC television. "I am personally committed to Citigroup. No doubt about that." Alwaleed agreed last week to increase his Citigroup stake to 5 percent from less than 4 percent.
Citigroup received the latest government infusion after its shares plunged 60 percent last week to below $4 amid growing concern it would need large amounts of capital to survive the recession, and less than a week after it set plans to slash 52,000 jobs, leaving it with 300,000 employees.
The stock rose $1.92, or 51 percent, to $5.69 on the New York Stock Exchange after trading as high as $6.50. The annual cost to insure $10 million of Citigroup debt against default for five years fell to about $250,000 from $500,000, according to Phoenix Partners Group.
The Citigroup deal broadly lifted shares in the U.S. banking sector. In afternoon trading, Bank of America Corp jumped 23 percent to $14.07, JPMorgan Chase & Co advanced 17 percent to $26.66, and Wells Fargo & Co rose 14.5 percent to $24.91, all on the NYSE.
ON THE HOOK
The $20 billion of government capital comes after it injected $25 billion last month. In this round, the government is buying preferred stock that will pay an 8 percent dividend.
"Authorities will do whatever they feel is necessary to ensure that the Great Depression will not return," said Gavin Graham, director of investments at BMO Asset Management in Toronto. "The effect on confidence is too great." Graham manages about $50 billion and owns some Citigroup debt.
In exchange for the bailout, Citigroup slashed its quarterly dividend to a penny per share from 16 cents. It cannot raise the payout for three years without U.S. consent.
Even so, taxpayers are now on the hook for nearly $250 billion of potential losses in the $306 billion portfolio, including commercial real estate loans, leveraged loans, and other assets representing 15 percent of Citigroup's $2.05 trillion balance sheet.
Citigroup will absorb the first $29 billion in losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. The Treasury Department, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest.
In return, Treasury and the FDIC will get $27 billion in preferred shares, of which $7 billion are a fee that Citigroup pays in exchange for the government guarantee.
The government is also getting warrants to buy $2.7 billion in Citigroup common stock at $10.61 per share for a potential he 4.5 percent stake. That's on top of the roughly 3.3 percent the government is entitled to buy under a previous deal.
"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview on Monday.
Citigroup estimated the injection will give it a Tier 1 capital ratio of 14.8 percent, more than twice what the government requires. The government also increased Citigroup's access to the Fed's discount window, adding liquidity.
TEMPLATE
The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."
Citigroup has one of the farthest international reaches of any U.S. bank, with operations in more than 100 countries. Investors have long speculated the government deemed it too big to fail because a collapse could cause global financial havoc.
The government package may become a template for other U.S. banks expected to face growing losses as the economy contracts. Losses once concentrated in mortgages are bleeding into other areas such as credit cards and commercial real estate.
The rescue magnifies the U.S. government's burden following bailouts of insurer American International Group Inc, Bear Stearns and mortgage finance giants Fannie Mae and Freddie Mac. Treasury also has injected more than $300 billion into banks and other financial institutions.
Already, more than $1 trillion of taxpayer money is at risk, and the Big Three automakers are seeking $25 billion more to avert bankruptcy. President-elect Barack Obama may also seek up to $700 billion for economic stimulus.
Earlier this month, U.S. Treasury Secretary Henry Paulson said a $700 billion industry rescue package to soak up toxic assets from troubled banks, like Citigroup, will instead only be used to inject capital into banks.
That decision sent mortgage and other debt markets into a steep decline.
Citigroup's problems were compounded by its decision to move back onto its books or buy back the tens of billions of dollars of assets it had held off its balance sheet.
The bank's market value on Friday was just $20.5 billion, down from more than $270 billion two years ago -- and even below the $25 billion initial U.S. capital injection.
Unlike in the bailouts of AIG, Fannie Mae and Freddie Mac, Pandit and other top executives were not asked to resign, though the government will have the final say on their compensation. Not all investors were pleased.
"You're seeing an inept management team being rewarded by the U.S. government," said William Smith, whose Smith Asset Management in New York has seen its Citigroup stock plunge in value over the years.
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Dow ends up nearly 400 after bailout of Citigroup
NEW YORK – Wall Street barreled higher Monday for the second straight session, this time in a relief rally over the government's plan to bail out Citigroup Inc. — a move it hopes will help quiet some of the uncertainty hounding the financial sector and the overall economy. The Dow Jones industrials soared nearly 400 points and the major indexes all jumped more than 4.5 percent.
The advance gave the market its first two-day advance since Oct. 30-31. Although investors sensed last week that a rescue of Citigroup was forthcoming, investors nonetheless were heartened, even emboldened, by the U.S. government's decision late Sunday to invest $20 billion in Citigroup and guarantee $306 billion in risky assets.
Wall Street's enthusiasm surged not only because the bailout answered questions about Citigroup but also because many observers saw the move as offering as a model for how the government might carry out other bank stabilizations.
"This could be the template for saving the banks," said Scott Bleier, founder of market advisory service CreateCapital.com.
"The government has taken a new quill out, they've gone to where they didn't go before in terms of trying to secure the system," Bleier said. "Some of that vulnerability seems to be gone now."
Still, the market remains wary, especially with the economy in a serious downturn. The Dow was up more than 500 points in the last hour before giving up some of its gains — many investors wanted to take some money off the table before the next bit of bad news arrives. And the market has frequently done sharp reversals since the start of the credit crisis 15 months ago.
The efforts from the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. to help stabilize Citigroup are only the latest this year to support a banking system troubled by bad debt and flagging confidence. Besides implementing its $700 billion bailout plan for the overall financial industry, the government has bailed out insurance giant American International Group Inc. and taken over lenders Fannie Mae and Freddie Mac.
"You're definitely seeing relief," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. "More than anything, the Fed repaired some of the psychological damage that was being done to the sector. I think the Fed is poised to do whatever they possibly can to help the financials get through the current turmoil."
"Not all banks are unhealthy, so knowing that the Fed is there is enough," Conroy said.
According to preliminary calculations, the Dow rose 396.97, or 4.93 percent, to 8,443.39.
Broader stock indicators also jumped. The Standard & Poor's 500 index advanced 51.78, or 6.47 percent, to 851.81, and the Nasdaq composite index rose 87.67, or 6.33 percent, to 1,472.02.
The Russell 2000 index of smaller companies rose 30.25, or 7.44 percent, to 436.79.
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