Bankruptcy

It?s Good to be Big, too Big to Fail

By J. Michael McBride

Hot on the heels of last week’s devastating slide in its stock value, now comes the news that Citigroup will be rescued by the federal government. The rescue plan which was hammered out over the weekend is similar to the one which almost happened with Wachovia when Citi was going to buy Wachovia. That was before Wells offered a better deal for Wachovia, which as we have noted in an earlier article, was indeed a better deal for the taxpayer in that it reportedly did not require taxpayer funds. Additionally, it was a super deal for Wells since a tax law change purportedly effected by the Treasury Dept (remember when we thought that the legislative branch made laws?) the day before Wells’s purchase made the deal essentially free to Wells. That’s right, the ability to “inherit” Wachovia’s tax attributes offset the cost of the deal for Wells. That’s a nice change in the law, at least for the acquiring party of a distressed institution! Back to Citi’s deal. Here is a quote relating this news:

“Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.

The second-biggest U.S. bank by assets surged as much as 72.4 percent in New York trading after the Treasury, Federal Reserve and Federal Deposit Insurance Corp. announced the aid plan in a joint statement. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend.

The regulators stepped in to protect Citigroup from losses on a $306 billion pile of troubled U.S. home loans, commercial mortgages, subprime bonds and corporate loans when the firm’s tumbling share price sparked concern that depositors might pull their money and destabilize the company, which has $2 trillion of assets and operations in more than 100 countries. The $20 billion of new cash comes on top of a $25 billion infusion the bank received last month under the Troubled Asset Relief Program, passed by Congress to shore up the financial industry.”

Not surprisingly, Citi shares rebounded nicely on this news. Friday’s close was a desparate $3.77 and it is now trading at $6.13 as of mid day.

Here is a link to one pretty good article on this topic:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aB.2gApqozI8&refer=home .

Michael

Full post as published by Texas Lawyer Blog on November 24, 2008 (boomark / email).