Monday, November 24, 2008

Citi's reward for reckless pursuit of profits: $306B guarantees plus $20B up front

You have to believe that many banks are licking their chops after looking at the deal that on-the-ropes Citibank got from the U.S. Treasury. In exchange for a guarantee of $306 billion in very troubled Citibank real estate assets, plus the injection of $20 billion of capital on top of the $25 billion pumped in earlier, the U.S. gets $7 billion worth of preferred stock paying 8% interest annually, well below the 12-13% rate that Citi would have to pay if it could get a commercial loan, which it apparently can't. The text of the deal here.

Nowhere in the agreement does Citi receive even a velvet-gloved slap of the hand for its reckless pursuit of profits, reported with devastating detail in this investigative piece in the New York Times and this analysis by the Washington Post's excellent business columnist Steven Pearlstein, who wonders if Citi is too big to succeed.

The agreement says to banks, in effect, that the U.S. will hold them harmless for profit-at-all-cost decisons as it showers bailout money on them.

President-elect Obama said today at his news conference that the financial/economic crisis requires action extending from Wall Street to Main Street. In the meantime -- almost two months -- it looks as if one of the worst players in Wall Street will be the primary beneficiary of the federal life line.

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