One size does not fit all. Citigroup (C) will get a bailout which does not look anything like the deal the government has made with other large banks under the $700 billion Paulson program. It also has little in common with the transactions cobbled together to save AIG (AIG).

The government will "back stop" $308 billion in Citi’s troubled assets. The bank will take the first $29 billion in losses sustained from this paper plus 10% of additional losses, for a maximum total ticket of $57 billion..

As part of the arrangement, the Treasury will put $20 billion into the bank for preferred shares and this amount will carry warrants. It will get another $7 billion in preferred shares for money it will invest to help cover the $29 billion that the bank may have to take on its portion of the $308 billion of assets that the government is guaranteeing. Citi will also have to cut its dividend to no more than $.01 a share per quarter.

According to Reuters, the government commitment will be broken into parts: The Treasury Department will get $24 billion of preferred shares, and the FDIC $3 billion. Of the combined amount, $7 billion constitutes a fee for the government guarantees. The government will also get warrants to buy $2.7 billion of common stock, comprising about 254 million shares at $10.61 each.

Citi’s troubled credit card portfolio, which could still face huge losses, is not including in the deal. The bank says it has 182 million open accounts. Credit losses in Citigroup’s global card division rose to $1.59 billion in the third quarter. As the economy worsens, that figure could easily be multiplied several times over.

Citi’s market cap is only $20 billion so it is not a stretch to say that, for the time being, the Treasury effectively owns that bank. This is doubly true because it has committed the government to move into Citi again if the bank’s losses grow beyond what the current package covers. This is not a contractual commitment but the Treasury will have to add more capital to protect its first investment and defend its philosophy that the bank is too big to fail". Citi’s troubles are not over. Its consumer debt could still swamp the bank in losses.

Citi has $2 trillion in assets on its balance sheet and more than $1.2 trillion in assets which are held "off balance sheet." The odds that these write-offs are over are extremely slim. It would only take the failure of a tiny part of these portfolios to add several billion dollars to Citi’s losses in future quarters.

Citi is now no more an independent entity that AIG is. That may not be clear today, but it will be the next time the Treasury writes the bank a check to help it with more losses. Odds are that day is not far off.

The government’s statement on the program:

As part of the agreement, Treasury and the Federal Deposit
Insurance Corporation will provide protection against the
possibility of unusually large losses on an asset pool of
approximately $306 billion of loans and securities backed by
residential and commercial real estate and other such assets,
which will remain on Citigroup’s balance sheet. As a fee for
this arrangement, Citigroup will issue preferred shares to the
Treasury and FDIC. In addition and if necessary, the Federal
Reserve stands ready to backstop residual risk in the asset
pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup
from the Troubled Asset Relief Program in exchange for
preferred stock with an 8% dividend to the Treasury. Citigroup
will comply with enhanced executive compensation restrictions
and implement the FDIC’s mortgage modification program.

Douglas A. McIntyre.

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