The Untold Story of the Bailout of Citigroup

By Pam Martens: August 8, 2012

It’s becoming a tragic fact of life in America – the more the 99 percent sacrifice and bail out Wall Street’s misdeeds, the more the taxpayer is sucker punched.  The New York Fed and the U.S. Treasury Department’s anti-taxpayer maneuvers that benefited billionaires Sandy Weill and a Saudi Prince in the bailout of Citigroup  are prime examples. 

Weill is the man credited with the repeal of the depression-era investor protection legislation known as the Glass-Steagall Act.  He effectively put a gun to the head of legislators to repeal the law by preemptively merging Travelers Group insurance, the Salomon Brothers investment bank, Smith Barney brokerage firm, with the commercial banking operations of Citicorp. 

Under the Glass-Steagall Act and the Bank Holding Company Act of 1956, FDIC insured banks could not merge with insurance companies or securities firms, in order to prevent the type of systemic risk that created the 1929 Crash and the Great Depression. The unmanageable and too big to fail behemoth that emerged from Weill’s illegal deal making was Citigroup. 

The Citigroup merger occurred in 1998.  Glass-Steagall was repealed on November 12, 1999 with the enactment of the Gramm-Leach-Bliley Act. It was just nine years later that Citigroup was teetering on the brink of collapse after holding $1.3 trillion off its balance sheet, gorging on toxic assets, and failing to disclose an extra $39 billion in subprime mortgage exposure.  (As we discussed yesterday in Part One, we still don’t know just how bad Citigroup’s accounting was because the SEC has redacted much of that information from public records on its web site.) 

According to an SEC filing made by Weill on April 1, 2006, the month Weill stepped down as Chairman of Citigroup, he owned 16.5 million shares of Citigroup common stock directly and 41,015 in his 401(k) plan, the bulk of which came from obscene compensation schemes that rewarded executives while punishing the average worker.  (Weill could have sold some of these shares after he was no longer affiliated with the company without making an SEC filing. What we do know is that he cashed in $264 million worth of those shares in October 2003 when the company was kind enough to buy the stock.) 

Citigroup was showing serious strains in 2007 but the meltdown came the week of November 17, 2008.  On Monday, the firm called a Town Hall meeting with employees and announced the sacking of 52,000 workers.  On Tuesday, November 18, Citigroup announced it had lost 53 per cent of an internal hedge fund’s money in a month’s time and that it was bringing $17 billion of off-balance sheet assets back onto its balance sheet. The next day brought the unwelcome tidings that a law firm was alleging that Citigroup peddled the MAT Five Fund as “safe” and “secure” then watched it lose 80 per cent of its value. On Thursday, Saudi Prince Walid bin Talal, a major shareholder, stepped forward to reassure the public that Citigroup was  “undervalued” and he was buying more shares. The next day the stock dropped another 20 percent to close at $3.77.

All told, Citigroup lost 60 per cent of its market value that week and 87 percent for the year to date. The company’s market value went from $250 billion in 2006 to $20.5 billion on Friday, November 21, 2008.

Now here is where you need to pay close attention.  Just one month prior to this stock meltdown, the U.S. government through its Troubled Asset Relief Program (TARP) had injected $25 billion into Citigroup on October 28, 2008.  With a market cap of $20.5 billion on Friday, November 21, 2008, the U.S. taxpayer effectively owned this company lock, stock and barrel. 

That’s how it works in a so-called efficient marketplace.  If there is only one lender of last resort and that lender is now out of pocket $4.5 billion, he is in a position to (1) let you fail, or (2) dictate onerous terms to let you survive.

But our government’s bailout program was in the hands of the crony New York Fed, where Sandy Weill had served as a Director from 2001 through 2006, and the U.S. Treasury Department, run at that point by Hank Paulson, former CEO of Goldman Sachs.

Instead of nationalizing the bank to protect the taxpayer’s interests, the Wall Street cronies did the opposite; they doubled down to the tune of $326 billion. That’s almost one-third of a trillion dollar commitment to a bank that had $2 trillion on its balance sheet, $1.3 trillion off its balance sheet, zero confidence in the marketplace, a serial history of egregious market violations and a stock value of $20.5 billion.  And, at this point, the SEC knew Citigroup was lying about its exposure to subprime debt and likely shared that with the Fed and Treasury. (See Part One.)

According to the official report from the Special Inspector General for TARP, here’s what happened next. On the morning of Thursday, November 20, 2008, Treasury Secretary Hank Paulson and New York Fed  President Timothy Geithner held a conference call with Fed Chairman Ben Bernanke, FDIC Chair Sheila Bair, and Comptroller of the Currency John Dugan (a former bank lobbyist) to discuss Citigroup.

The next day, Friday, November 21, 2008, the New York Fed convened a conference call with Citigroup officials. During this conversation, the Fed reported that it became clear that liquidity pressures had reached crisis proportions.  Again, the U.S. government report is simply confirming that Citigroup had no other options and the government was in a position to dictate the terms. 

Instead, according to the report, the New York Fed “requested that Citigroup submit a proposal for additional Government assistance, without specifying the details of what Citigroup should include in the proposal.” This sounds very much like, “Just tell us what you want and we’ll oblige.” 

Late on Sunday evening, November 23, 2008, after four days of what the Fed and Treasury refer to as “Citi Weekend,” the monster funding package was announced. 

The government was going to guarantee a toxic asset pool at Citigroup up to $306 billion (later reduced to $301 billion). As a fee for this arrangement, Citigroup would give the government $7.059 billion in perpetual preferred shares, paying 8 percent annual dividends. And where would an insolvent bank get the funds to pay an 8 percent dividend; from another injection of $20 billion in cash from the government. The Fed also agreed to backstop residual risk in the asset pool through a non-recourse loan if necessary.

The Treasury was also to receive warrants to purchase 66,531,728 shares of common stock at a price of $10.61 per share. (Adjusting for the company’s 1 for 10 reverse stock split, Citigroup closed yesterday at $2.89 – a far distance from a warrant exercise price of $10.61.) 

According to the Special Inspector General of TARP, he could find no “documentation of the decision-making process behind the $20 billion capital injection.” 

The Treasury and the Fed knew exactly whose interests they were protecting.  Just 11 months earlier, Citigroup had publicized a capital raising of $12.5 billion in convertible preferred stock in a private placement – meaning the full details were not released to the public.  The press release said the investors included Saudi Prince Alwaleed bin Talal and Sandy Weill and the Weill Family Foundation. 

Following press articles that ran the details in February of 2009, on June 9, 2009, the U.S. Treasury agreed to swap its $25 billion of preferred stock for 7.7 billion shares of common. 

Common stock ranks at the very bottom of the chain in terms of claims on the assets of a failed institution.  The government effectively put the taxpayer behind Citigroup’s creditors, bondholders, and its preferred stockholders. It gave up the taxpayers’ place in line as a preferred stock holder and sent the taxpayer to the back of the line. And, it gave up the 8 percent fixed income stream on the preferred. 

But the plan to bail out the Saudi Prince, Sandy Weill and a select group of “private investors” is cryptically contained in this proxy statement dated June 18, 2009. 

The private investors, who made their purchases on or around January 15, 2008 were going to be made whole on their $12.5 billion investment on or around March 18, 2009, despite the fact that Citigroup’s stock had fallen by 88 percent in that period of time. (Their preferred stock was convertible into common.) 

I’ve been reading proxy statement for over 30 years.  I have never read a more convoluted, tangled web of unnecessary complexity to arrive at the clear destination: private wealthy individuals were being made whole. 

Now I can guess the argument that the Treasury and the Fed would make.  Citigroup could no longer afford to pay either the government or the private investors the high fixed rate of interest on the preferred stock.  To induce these investors to convert to common, they needed an incentive – like being made whole. My argument would be that they would have been wiped out already in November of 2008 if the U.S. government had negotiated properly. 

The proxy goes on to tell us the following: 

“The holders of our Interim Securities following the consummation of the USG [U.S. Government]/Private Holders Transactions will be the USG, the Government of Singapore Investment Corporation Pte Ltd., the Kuwait Investment Authority, HRH Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, Capital Research Global Investors, Capital World Investors, the New Jersey Division of Investment, Sanford I. Weill and the Weill Family Foundation. After the approval of the Authorized Share Increase and the conversion of the Interim Securities into shares of common stock, depending on the levels of participation in the Exchange Offers, some of these persons will be significant stockholders, and certain of these persons may hold more than 5% of our common stock.” 

I found it impossible to track this process through SEC filings to see precisely how this deal panned out.  But that is what was being planned on June 18, 2009. 

On December 16, 2009, Citigroup announced it was selling more common stock to raise funds to repay $20 billion of its TARP funds.  Selling more common stock meant it was diluting the taxpayer’s stake in the 7.7 billion shares still owned by the government. 

The government put the taxpayer at risk for another full year before it dumped its 7.7 billion shares of common stock, selling it off from April 26, 2010 through December 10, 2010. 

Both the Treasury and the Fed were hoping that the public would never hear the details of the trillions that were flowing to Wall Street behind the scenes, in addition to the publicly acknowledged programs.  Once that information was released, we learned that Citigroup borrowed $2.513 trillion from the Fed between December 1, 2007 through July 21, 2010, according to the Government Accountability Office. 

Those funds were loaned at an interest rate dramatically below the market rates that a subprime borrower like Citigroup would have paid in an honest market system.  While Citigroup was charging struggling consumers rates as high as 17 percent, it was borrowing from the taxpayer at a fraction of one percent. 

Isn’t it time for our government to speak honestly about the Citigroup bailout?

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