Citigroup Update: Government Looking To Buy Assets

[girl gone mad]

Update: The government is looking to buy substantial amount of assets from Citi like a good bank, bad bank structure. The government will absorb much of the losses for Citi if there are losses and Citi would issue preferred stock to the government.

The Feds could buy more than $100 billion in the bad assets if the plans go through. But that doesn't mean it will pay Citi $100 million. The deal is not finalized but could be announced tonight. Reports from Washington say the White House is unaware of any government talks with Citigroup. It also decline comment on whether President Bush would back a government rescue of Citigroup.

Citi officials are reportedly working on a plan that could include a capital injection from the Federal government—among other possible ideas. The details have yet to be hammered out and it's not clear when such a plan would be announced.

Officials from Citigroup and the government had been discussing ways to stabilize the company's stock price over the weekend.

As of Saturday afternoon, the general consensus between officials from Citi and government officials from the US Treasury department and US Federal Reserve is that the government will not takeover Citigroup in the way it took control of AIG—by lending the firm massive amounts of money and in return assuming a huge equity position.

Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup's balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.

http://www.cnbc.com//id/27873985

[BelgianMadCow]

1. Whoa there - so these Treasury & Reserve officials run the show and the president is unaware?!

Helllooo? Anyone home?

[DJ13]

2. The government will absorb much of the losses for Citi

When will they absorb my losses?

[Skink]

3. Here's a question. Why does a company go under if the stock tanks?

Aren't stocks just one asset of the company?

[JohnWxy]

5. Stocks should represent the Net Worth of the company (i.e. Assets minus Liabilities).

If liabilities approach the value of the assets then your common stock share price should approach zero.

[rgbecker]

6. Stock price indicates value investors think the company is worth.

Investors think Citibank is still in the dark about the value of its assets (Loans/mortgages) and are worried, thinking it is time to sell. Not so many buyers, so price of stock, which represents the worth of the bank, goes down. Stocks are not the assets of the company, but rather a ownership share of the company. Picture the bank having say three branches, each worth $300,000 for a total value of $900,000 plus some loans/mortgages worth $1,100,000. Say there are 200 hundred shares outstanding and you have 10 of them. Each share is worth $10,000. ($2,000,000/200 = $10,000). Your 10 shares are worth $100,000. You hope the company makes some money and pays you a portion (a dividend) each quarter, and that the price of each share goes up. Unfortunately, some of the loans are not paying and the branches are losing value in the RE market, so your shares will be hard to sell for the $10,000. No buyers have the confidence in the present market to invest in the bank now. What to do? Cut your loses and sell now or hold on and wait for some rationality to return to the market.

The banks that are closing up (Declaring bankrupcy) are doing so because they don't have the money to make good on the loans they have taken out, or to return the depositors their money. Maybe they can't pay the help (tellers etc.) because the loans they made are not paying. I don't think Citibank is that far along, but obviously something is spooking the investors, and they don't want to own this bank and so they do not want to buy this stock.

My wife has had 100 shares of Citibank for years and at one time after trading around 20 - 30 dollars a share, it had to clear out a bunch of bad loans and the stock dropped to around $10/share.
During those 2 or 3 years it paid no dividend. Then the price soared and the stock split several times, and now she has 1000 shares. Dividends poured in at the rate of about $400 a quarter for this original 100 share investment and the price hung around 50/share. In september it dropped to around 30/share. In oct it dropped to 20 share. then 10 and now 4.

I'm convinced the market is just freaked out right now and will soon realize that this 800 billion dollar bank isn't going anywhere. The return in dividends over the years have made the investment worth much more than many other investments.

Long winded, I know, but maybe it helps to get this off my mind.

[girl gone mad]

7. Value investors aren't fools.

They know better than any other class of investors that a bank's true value lies in its reputation. Citibank has lost the public trust and is therefore a worthless entity to them. They are betting that it won't survive very long, and if it does it will be no more than a shell of its former self. I wouldn't bet against them.

[gravity]

8. Financial stocks are different

When the stocks prices tumble, it can cause investors to lose confidence in the company. This causes the prices of its tradable securities to decline, which the banks then has to write off, causing more losses. It becomes a self fulfilling prophecy. Others stop doing business with the bank in fears that it will go under, which basically creates a bank run.

This has never really been a problem in the past because there was enough confidence and liquidity in the markets to correct these problems. But now that we are on the brink of collapse, no one has confidence in the free markets to offer a safety net anymore.

[Warren Stupidity]

4. I want to divide my mortgage into a 'good mortgage' and 'bad mortgage'.

I'll keep the good one, on which I'll owe around 2,000, while the government will get the bad one, on which they get to pay around 200,000. The house of course goes with the good mortgage (that is what makes it 'good'), while it turns out that the bad mortgage has nothing for collateral other than an in-the-box never used roof rake sitting in my garage, (which is why it is so damn bad.)

[abelenkpe]

9. More money for citibank?

And then what....two weeks from now they announce another 50,000 employees being laid off?

All these bailouts and attempts at stimulating the economy have been a complete waste so far.

When will someone announce a plan that actually results in people being hired into lucrative stable jobs?

[girl gone mad]

10. Update: looks like we should get an announcement..

of a rescue package any minute now.