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...effect, that the TARP was going to be rolled up, having not spent some $300 billion in funds that Congress, after much drama, had allocated. Then Citibank teetered, and out came the TARP again, this time in pretty much its original guise: to ring-fence the toxic assets on Citi's books. This made some sense, because leaving toxic assets on banks' books, at a time when additional assets may well be losing value because the economy is weakening, means that recapitalizing the banks doesn't have the same effect that it would if those bad assets were removed from...
...What are the chances we'll have to save Citi yet again? There are still plenty of questions about Citi's long-term health. The government's rescue addresses $306 billion worth of troubled assets from Citi's $2 trillion balance sheet. The bank, though, has roughly another trillion dollars in assets that aren't on its balance sheet but kept in entities somewhat removed from the company. These assets could be problematic if the economy grows worse. Fox-Pitt Kelton's Trone also points out what's not included in the government backing: $129 billion in nonresidential consumer loans...
Plus, there's market psychology to contend with. The jittery stock market isn't about to calm down anytime soon, and those jitters apply doubly to financial institutions. Moreover, during the past two decades Citi has made some hundred acquisitions, leaving a sprawling company that can be incredibly difficult to understand. "The market lost confidence that Citigroup, which is such a vast organization, had it all under control," says NYU's Smith. "The question is, Does this intervention restore confidence to a market where we're dealing with psychology and not analytics?" In this environment, it probably pays...
...Does this rescue mean Citi's stock is a buy? With the government injecting a total of $27 billion into Citi and getting warrants to buy more shares, existing shareholders will be diluted - in other words, every shareholder now owns a smaller slice of the business. On the upside, the government's involvement has already sent the stock on a mini tear, to $5.95 at Friday's close, up from last week's low of $3.77 (about the cost of an ATM fee at one of Citi's branches, as one commentator pointed out). (See 10 things to do with...
...other immediate effect: common stockholders can say goodbye to their dividend, which was 16 cents last quarter. To make sure the government's money - i.e., the taxpayer's money - isn't simply passing through the company and into other hands, the deal prohibits Citi from paying dividends of more than a penny per share for three years without approval from Treasury, the FDIC and the Federal Reserve. If Citi goes out and raises more money on its own through a common stock offering, there's a greater chance the government will allow for a larger dividend to be paid. That...