Taxpayers Lose in Citi's Payback PlanBy Zach Carter
December 21, 2009
Taxpayers are getting a raw deal in Citigroup's plan to repay its bailout funds, but you wouldn't know it from reading the news. Policymakers are emphasizing the wind-down of the unpopular Troubled Asset Relief Program, and most media outlets are doing the same. But the sloppy structuring of Citi's repayment plan is going to cost the government literally billions of dollars.
The government has two types of investments in Citi: $20 billion in the company's preferred stock, and a 34 percent stake in its common stock. Preferred stock is basically a loan that Citi has to pay back with interest, while each share of common stock gives us partial ownership of the firm. With an interest rate of 8 percent on the preferred stock, the loan is well below market rates, since the government funneled the money to Citi when it was on the verge of collapse last year, and emergency loans like that carry a very high interest rate among investors. But we do at least get paid a return on that investment.
The value of our 34 percent stake in Citi's common stock, by contrast, depends on the stock's trading price. The government bought its roughly one-third stake in February for $25 billion. On Friday, the last trading day before Citi announced plans to repay TARP, the value of that stake had risen to $30.7 billion, for a gain of $5.7 billion. That's a terrible return given the risk taxpayers were taking, but it's still a return.
On Monday, Citi said that in order to have enough money to pay off the government's $20 billion loan, it was going to raise about $20 billion by issuing more shares of common stock. The company's financial health has improved; it can raise money from the private sector and pay back the taxpayers. Sounds great, right? Wrong. .............(more)
The complete piece is at:
http://www.thenation.com/doc/20100104/carter2
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