Why Citi Was Bailed Out

The fact is - they made a lot of bad loans.... subprime loans /// no doc interest only 100% financing loans for people upsizing to McMansions etc.

So - the government is rewarding them for their screw ups..... Yet the people who got screwed by these loans - are...well....screwed....

Why Citi Was Bailed Out

Whether the government's rescue of Citigroup Inc., announced late Sunday, will ultimately prove a good deal for taxpayers is hard to tell. In part, that's because no one seems sure what Citi's troubled assets are actually worth.

If the gamble pays off, Citigroup would be back on firm footing, unhinged financial markets would recover and taxpayers would turn a profit. If it doesn't, taxpayers would take a hit. And they would possibly have to rescue still more huge financial institutions, digging the bailout hole even deeper.

The case for rescuing Citigroup, a company with 200 million customers and operations in more than 100 countries, may be more persuasive than the case for smaller banks whose reach doesn't extend so far. Still, the government action makes other financial companies more likely to seek federal aid.

Citigroup was hit especially hard by the meltdown in risky subprime mortgages made to people with tarnished credit or low incomes.

Under the loss-sharing arrangement, Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets, which stays on its books. Beyond that amount, the government would absorb 90 percent of the remaining losses and Citigroup 10 percent. Money from the $700 billion bailout and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup.

As a condition of the rescue, Citigroup cannot pay quarterly dividends to shareholders of more than 1 cent a share for three years unless it obtains consent from the three federal agencies. The bank is now paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter.

The agreement also restricts executive pay, including bonuses. But it doesn't get rid of Citi's top management as the government did with AIG.