Citi Bailout: An "Extremely Unusual" Deal

The government and Citi have (finally) agreed on a bailout, and the structure of the deal is a bit of a shocker. From the WSJ:

Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. Treasury officials will charge a higher interest rate for the capital injection -- 8% for the first few years -- than it has charged to dozens of other banks now borrowing money under the government's the $700 billion rescue package approved by Congress last month.

In addition to the capital, Citigroup will have an extremely unusual arrangement in which the government agrees to backstop a roughly $300 billion pool of its assets, containing mortgage-backed securities among other things. Citigroup must absorb the first $37 billion to $40 billion in losses from these assets. If losses extend beyond that level, Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed.

Citigroup would also agree to work to modify -- if possible -- troubled mortgages held in the $300 billion pool, using standards created by the FDIC after the collapse of IndyMac Bank.

The government guarantee is essentially the same deal that Citi had struck with the FDIC in its failed acquisition of Wachovia, with slightly less favorable terms. In the original deal between Citi and the FDIC, the FDIC was going to backstop a $312 billion pool of assets, with Citi responsible for the first $30 billion in losses and the government responsible for the rest. Now the government is guaranteeing a slightly smaller pool of assets ($300 billion instead of $312 billion), and Citi is responsible for slightly more of the losses ($37/$40 billion instead of $30 billion). Making the deal more punitive is appropriate, seeing as Citi is already benefiting from huge amounts of government aid.

Whether this is a good deal depends, obviously, on what's in the $300 billion pool of assets. Also crucial is what remains on Citi's balance sheet, including its various SIV's. If the aim of this deal was to shore up confidence in Citi (and from all indications, it was), then the deal should include mandatory disclosure of all Citi's off-balance-sheet liabilities.

UPDATE: Here's the term sheet, which has some additional information. Highlights:

• $306 billion pool of assets to be guaranteed, not $300 billion.

• Citi will bear the first $29 billion in losses, and the remaining remaining losses will be shared by the government (90%) and Citi (10%).

• Dividends on common stock in excess of $0.01 per share per quarter are suspended for 3 years, unless the government consents to the dividend. It's unclear whether common stock dividends in the next 3 years will require the consent of the Fed, Treasury, and the FDIC, or some combination thereof.