Citigroup Bailout: $20B, Total Cost So Far: $3.5T

Another One Bites the Dust

The news came out late on Sunday that Citigroup is getting a bailout from the Federal Reserve, amounting to $20 billion dollars. 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 (TARP).

Citigroup's stock has lost about 80% of its value since the beginning of the year, and has dropped below 5$ last week for the first time since the mid-1990s. At the time of writing, the Federal Reserve just announced “it is to inject another $800bn into the US economy in a further effort to stabilize the financial system.” [article]

Even as most stocks rallied on the news that President-elect Obama had selected Timothy Geithner to be the next Treasury chief, Citigroup continued its fall. My gut tells me short-selling of Citigroups stock had something to do with this.

As discussed in my previous post [Secret $2T Fed Program], we must look at whose interests are best served by all of this. The reason Citigroup was not an attractive acquisition target to any of its competitors is because of its heavy baggage of about $306 billion in “risky assets” that it had on its books.

So if you’re J.P. Morgan for instance, and you buy up Citigroup for $20.5 billion (Citigroups market capitalization on Friday Nov. 21st, 2008), you are still taking a big risk with the $306 billion Citigroup has on its books. Even though Citigroup has $2 trillion in total assets [article], it is not liquid. This means that it would be very difficult to get cash for the $2 trillion in assets in the event that you need to start writing off the rotten ones. How do you get around this annoying $306 billion?

Pass it on to the Taxpayers

If I was a billionaire banker who owned stock in Federal Reserve and who was receiving a piece of the $3.5 trillion from my company (The Fed), this is what I would do:

1) I would short-sell the stock of Citigroup to the point that the company loses 60% of its market capitalization in 3 days: Citigroup was worth $51.8 billion on Friday Nov 14th, 2008. One week later, it was worth $20.5 billion. At the beginning of 2008, Citigroup was worth $160.4 billion. [Source: Google Finance]

2) I would then get my company, the Federal Reserve, to step in and lend Citigroup (who is also an owner of the Fed) $20 billion.

3) I would also get the Federal Reserve to “step in to protect Citigroup from losses on $306 billion of troubled U.S. home loans, commercial mortgages, subprime bonds and low-grade corporate loans.”

4) Now Citigroup is a much more attractive candidate for a merger or acquisition because the Federal Reserve is guaranteeing all of its “toxic assets” through taxpayer dollars.

“There will surely be ongoing chatter about a breakup of Citi once the dust settles,” analysts at Royal Bank of Scotland Group Plc. [article] Which one of the remaining banks will be the one doing the acquisition after the next “big one” falls?

A Little Perspective Please

So let’s start thinking about everything that’s been happening for the last few weeks:

Size of Citigroup bailout (so far & that we know of) = $45B
GDP of Sudan = $46.2B
GDP of Slovenia = $46.1B
GDP of Ecuador = $45.8B
Source: [wikipedia]

The reason I say "that we know of" is because of the secret $2 trillion Federal Reserve program which I covered in my last post. Since we do not know how much each bank got through that program, we are left with a minimum of $45B for Citigroup.

What's really disturbing is Citigroup’s bailout is roughly the same as the GDP of each of these three countries. Pause. Take a minute to think about and process this information. It is staggering to say the least.

Here is something else for you to pause and think about: $2 trillion, then $700 billion and now $800 billion. People are tossing around these huge numbers for bailing out banks and corporations, but I don’t think anyone has stopped for a second to realize how big the figures we are talking about really are.

99% of which is for banks

Do you have any idea how much money that is and what you could do with this amount of money?

As of 2008, half of the worlds population lives off less than 2$ per day. The world population as of 2008 is 6.72 billion. [wikipedia] So at 2$ per day, to feed half of the world for one day it costs $6.72 billion (50% x 6.72 billion people x 2$ per day). For one year, it costs $2.5 trillion. This still leaves about $1 trillion. Assuming it costs $500,000 to build a school, and $1 million to build a hospital, you could build over 650,000 schools and hospitals around the world.

To recap: $3,500,000,000,000 could be used to feed half the world for one full year AND build 650,000 hospitals and schools. Instead, all of this is going to the people who caused this whole financial crisis to begin with. And the taxpayers will be left with the bill at the end of the day.

What is Happening in our World?

When did banks become more important than the well being of society and human beings? More importantly, when did people stop thinking about these kinds of things and asking themselves important questions about the kind of society we live in?

All the information is right in front of us; all we need to do is wake up and start paying attention. Don’t let the system feed your mind, use your mind to think for yourself.

My hats off to the rulers of the banking establishments, you have pulled off the biggest heist anyone could ever have imagined in their wildest dreams...


Further readings:

Reuters - Citigroup Gets Massive Government Bailout

International Herald Tribune - U.S. approves plan to help Citigroup deal with losses

Bloomberg - Citigroup Gets U.S. Rescue From Losses, Cash Infusion