Monday, November 24, 2008

Breaking News : US Govt rescues Citigroup!

UPDATE: Someone posted in the comments section from a newswire repot : "In return for the bailout, Citigroup's dividend will be essentially wiped out. The bank cannot pay out more than 1 cent per share per quarter over the next three years without government consent. The quarterly dividend is now 16 cents.". The only value in GIC's convertible securities is the 7% that Citigroup payout as dividends. Did the Singapore govt just lose $10B in the past 8 hours???....They could have used that money to make medical care free for the underprivileged for the next 20 years, use it to help those who lost their jobs and the students who cannot afford to pay their tertiary eduction and increase the special assistance so that recepients can afford decent meals. It is a real shame. Name one other govt in the world that lost $10B investing in a single investment....tell me...see the PAP is worldclass...worldclass losers.

The US govt injected US$20B for a stake in Citibank. Given Citigroup's capitalisation of $20B, the US govt probably took a stake of 50% or higher in the company. The problems do not just end there Citigroup has $300B in deteriorating assets and these will now be guaranteed by the FDIC.

Hmmm....where does that leave GIC?
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http://biz.yahoo.com/ap/081124/citigroup.html
Government unveils plan to rescue Citigroup
Monday November 24, 12:15 am ET
By Jeannine Aversa, AP Economics Writer
Government unveils plan to rescue Citigroup, including taking $20 billion stake in the firm
WASHINGTON (AP) -- The government unveiled a bold plan Sunday to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.
The sweeping plan is geared to stemming a crisis of confidence in the company, whose stocks has been hammered in the past week on worries about its financial health.
"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the three agencies said in a statement issued Sunday night. "We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks," they said.
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The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one -- of $25 billion -- in Citigroup in which the government received an ownership stake.
In addition, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) -- The government unveiled a bold plan Sunday to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.
The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.
The sweeping plan is geared to stemming a crisis of confidence in the company, whose stocks has been hammered in the past week on worries about its financial health.
"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the three agencies said in a statement issued Sunday night. "We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks," they said.
The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one -- of $25 billion -- in Citigroup in which the government received an ownership stake.

In addition, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

12 comments:

yamizi said...

Lucky,

How will Singapore be affected by this?

LuckySingaporean said...

Yamizi,

It is not clear. But continuous dilution means our GIC convertibles has no chance to convert and Singaporeans will break even getting the capital back only after 15 years....

Anonymous said...

Extract from http://news.yahoo.com/s/nm/20081124/bs_nm/us_citigroup_12

[Quote] In return for the bailout, Citigroup's dividend will be essentially wiped out. The bank cannot pay out more than 1 cent per share per quarter over the next three years without government consent. The quarterly dividend is now 16 cents. [Unquote]

Does anyone know if GIC's convertible preference shares' dividends of 7% is wiped out too?

So much for 'wise guys' in our nation's investment arms for engineering 'protective' clauses into their mega deals.

http://www.post1.net/lowem/entry/citigroup_loses_almost_10b_writes

LuckySingaporean said...

The thing is the convertible pref is between a share and a bond so it is neither here nor there. Bond holders will get paid unless there is bankruptcy. In bankruptcy they get paid ahead of pref. share holders.

I think GIC has to announce the status of its Citigroup pref shares soon. The uncertainty is making Singaporeans very worried - the certainty might also make SIngaporeans very worried.

Anonymous said...

oh sh!t. we need accountability and transparency.

is anybody organising a demonstration for these $10,000,000,000? divide this by 3.5million, how much is each of us losing???

TeE said...

The covertible function (essentially, an option) is definitely as good as worthless.

Now the point is, how likely is citigroup to continue paying the divideneds for its preferred shares.

If you are a perpetual bondholder of citibank, what is yield you would demand given the risks. And how you do you fancy your chances of getting these dividends? Then Work out from there.

If GIC can continue to get its 7% dividends, then I would see little problem since it's the option component (usually worth a minority fraction of original
price) that would be affected.

TeE said...

hmm. I read that the US government also have preferred shares in this deal. I wonder to they have priority over GIC.

In any case, GIC should consider themselves lucky and 'be thankful' that the US government is bailing CITI out with a massive cash injection.

If Citi goes into insolvency (no equity for any class of shareholders to share), unable to pay its debtholders, then you would expect both the preferreds and the embedded option component to be totally worthless.

The bailout is essentially preserving the value of the preferred shares.

Anonymous said...

This will not be the last. Read this link:


http://www.futurefastforward.com/component/content/article/388

Anonymous said...

This will not be the last. Read this:

http://www.futurefastforward.com/component/content/article/388

Anonymous said...

Maybe one day sinkies will learn econs 101 ...
Huge budget surplus is not "good".

It simply means too much taxes and under-investment.

terence said...

I am no financial guru, but this article seems to suggest that GIC still gets its annual payouts.

http://blogs.wsj.com/deals/2008/11/24/big-citigroup-bailout-big-citigroup-dividend/

LuckySingaporean said...

anon 2:08,

THanks for the link. Today's TODAY asks the govt to clarify if they will still get this 7% dividends as the terms of the convertible is totally unknown.