Monday, November 24, 2008

Citi Is Not The Only One Who Never Sleeps....

So, here is the plan:

-- The Treasury Department will purchase $20 billion of preferred stock, funds will come from the TARP. The quarterly, 8% dividend is cumulative. In addition, the Treasury will receive 10 year warrants for the purchase of $2 billion of common shares. The strike price on the warrants is $10.61.

-- Citigroup, Inc. will issue an additional $4 billion of the preferred to the Treasury and $3 billion to the FDIC as payment for a limit on asset losses. This pool of assets is comprised of residential (10 year window) and commercial (5 year window) mortgage related loans and securities, a total of $306 billion worth. Citi will absorb the first $29 billion of losses (pre-tax), after which the the government will absorb 90% of further losses. Since Citi is only on the hook for 10% of the further losses, the risk weighting will be lowered to 20%. This has the effect of adding $16 billion of capital to Citi's reserves. Citi will also be able to count $3.5 billion of the "put premium" as capital.

-- The Federal Reserve has agreed to extend Citi a non-recourse loan to backstop the positions. Should the loan become exercised, the rate would be OIS + 300 basis points.

-- Citi also agrees to a government approved executive compensation plan and common stock dividend policy. The dividend is limited to $0.04 per year for the next three years, unless approved by the government.

Equity futures are pointing to a 1% rally, Citi shares have traded over $5 in Germany.

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