The Citi bailout deal

CNNMoney:

The U.S. federal government on Sunday announced a massive rescue package for Citigroup - the latest move to steady the banking giant, whose shares have plunged in the past week.

The plan has two key features:

First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

In addition, the government will get warrants, or the right to purchase $2.7 billion worth Citigroup shares in the future.

The government will impose restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share for the next three years and will face limits on executive compensation.

Plus, Citigroup will be expected to adjust mortgages for troubled borrowers, using procedures similar to those the FDIC implemented at IndyMac, which it took over last summer.

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I did not see any mention of Obama economic adviser Robert Rubin and his role at Citi. I think that would be an interesting aspect of the story about an institution that has gone into great decline since he took over. If he is still affiliated, apparently there will be some limits on his compensation. I feel certain that a situation like that would be of great interest if Republicans were involved.

The deal does not strike me as that great for the government. Getting $7 billion for guaranteeing $300 billion in loans seems awful cheap. The warrants for $2.7 billion in shares of Citi are essentially worthless at this point, although they could have value if the bailout is successful. These goodies appear to be mostly window dressing at this point.

This NY Times story gives some idea of Rubin's influence on the new administration despite th woes of Citi.

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The president-elect’s choices for his top economic advisers — Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director — are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin’s chief of staff in the Treasury Department who followed him to Citigroup, and James P. Rubin, Mr. Rubin’s son.

All three advisers — whom Mr. Obama will officially name on Monday and Tuesday — have been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation, a combination that was credited with fueling the prosperity of the 1990s.

But times have changed since then. On Wall Street, Mr. Rubin is facing questions about his role as director of Citigroup given the bank’s current woes. And in Washington, he and his acolytes are calling for a new formulation to address the global economic crisis that Mr. Obama will inherit — and rejecting or setting aside, for now, some of their old orthodoxies.

Instead of deregulation, Mr. Obama has sworn to usher in a period of re-regulation, to avoid the freewheeling risks that Citigroup and the rest of the financial industry undertook after Mr. Rubin, with Mr. Summers, helped tear down the regulatory walls between banks, brokerages and insurance companies, and freed them to trade in unregulated and little-understood derivatives worth trillions of dollars. Mr. Geithner spent his first years as president of the Federal Reserve Bank of New York seeking ways to at least monitor those markets better.

Instead of balancing budgets, the Obama team will be going deeper into debt for at least two years by spending hundreds of billions of dollars more to stimulate the economy, without concern for deficits, for aid to the jobless, states and cities; tax cuts for workers; and job-creating construction of roads, schools and other public works. Nor, given the downturn, is Mr. Obama expected to try to quickly bring in more revenue by repealing the Bush tax cuts for those making more than $250,000.

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There will be no balanced budget in the Obama administration. Obama has also shown a hostility to free trade. He seems to be saying that he can change policy with the same old Democrat players.