Are taxpayers actually profiting from their stake in Citigroup?

The original rescue package involved the Treasury’s purchase of $20 billion in preferred Citigroup stock while guaranteeing the value of $300 billion in troubled assets. As a reward for their guaranteeing of the assets, the Treasury was granted an additional $7 billion in preferreds, making the total value of the deal $27 billion dollars. This brings me to the first clear sign that we are not getting as good of a deal as we think. The market value of Citi at the time of this deal was less than $27 billion, but upon the time of conversion of these preferred shares to common, the taxpayers were only granted a 27% stake in the company. Despite providing Citi with enough bailout money to have complete ownership of the company, we, the taxpayers, barely got more than a quarter. So even though the Treasury is now cashing its shares out at a profit, it’s a profit based on the misaligned state of ownership we were granted.

The media misrepresentation of this “profitable deal” doesn’t stop there. There were countless of other taxpayer payouts and subsidies granted to Citi that further show how skewed our knowledge of the deal is. First, as referenced in Baker’s blog, was the “too big to fail” subsidy which allowed Citi to borrow at much lower costs than if it were to have to compete on the open market. This subsidy is predicted to be as much as $4.4 billion per year.  Other handouts include our undercharging in interest payments on the original TARP issuance of $25 billion to Citi that was repaid this past December, assessed at about $9.5 billion, and the artificially low interest rate on their $64.6 billion in outstanding FDIC guaranteed loans that saves them about $1.4 billion a year. On top of those subsidies, a majority of Citi’s bad assets that were sold off their books were purchased by Fannie Mae and Freddie Mac at prices higher than their actual value. Since Fannie and Freddie are also beneficiaries of our tax dollars, every “good” price given to Citi for a bad asset is erased by the losses of the “bad” price being paid for it by Frannie and Freddie. This subsidy is estimated at about $6 billion, and when accompanied with a similar Federal Housing Authority subsidy of about $3 billion this brings the total subsidy value to $24.3 billion.

To provide extra liquidity to the frozen credit markets, the Fed initiated various special lending facilities that enabled Citigroup to borrow short-term money at relatively no cost. Assuming that Citi was a recipient of some of this money (the government does not release the recipients to the public), Citi was granted a position in which they could borrow at close to zero and lend at over three and a half percent. A realistic estimate of this benefit is around $7 billion. Finally, the Fed’s program for buying mortgage backed securities artificially held down mortgage rates at a benefit to Citi’s books but an eventual loss to us. Looking at these true conditions of our deal, as presented by Baker, it’s hard to argue that we got a “good deal” out of bailing out Citigroup. But your average taxpayer will never be presented this information. Call it media manipulation or call it lack attentiveness on our part. But whatever you call it, we aren’t getting as good of a deal as we’re being made to believe.