6 ms·

Treasury Reaps Billions as It Sells Citi Shares

30 points by donohoe 16y ago

infynyxx 16y ago
And they are also planning to sell AIG and GM shares most probably with decent profit. And still, TARP will likely to be one of the main reasons for downfall of Democrats.
netmau5 16y ago
In a really roundabout way, the Fed is manipulating securities in much the same way Wall St did during the financial crisis. Only an entity with that much buying power could make such a vast investment with such incredible terms. It seems like they said, "we're gonna loan you a bunch of money and then you're going to owe us that much and then some back, and to protect our investment, we will make a guarantee to your solvency so our floor is profit."
- jeromec 16y ago
  The U.S. Treasury stepped in to prop up the banks (i.e. the financial system) with the Troubled Asset Relief Program or TARP. This was essentially taxpayers loaning money to banks in trouble which were threatening to bring down the entire financial system, since no one else would, in exchange for ownership in the banks. The Federal Reserve is not the same thing as the Treasury.
  - jswinghammer 16y ago
    You're correct but the Federal Reserve took actions on its own to try to make the banks solvent and directed the treasury on its course of action. The Federal Reserve ended up with a bunch of garbage on its balance sheet as a result of this activity. We don't know to what extent because there is no full audit of the Federal Reserve's activities in this department (for our benefit of course). We do own the "Red Roof Inn" though so that's cool I guess. http://www.youtube.com/watch?v=pE3oiKuU8UI http://www.youtube.com/watch?v=pE3oiKuU8UI
    - jeromec 16y ago
      Yes, you're correct. The Fed I believe was forced to purchase many of the toxic securities directly. Many people don't understand just how severe and dire the situation was. One thing I'm not quite clear about is what happens at the individual home level with some of those securities. For each of the mortgages sent up to Wall St., who is the legal owner of it? I read somewhere that many of these mortgages were sitting in boxes in warehouses somewhere. If you've signed to repay a loan to a lender, how can those terms be enforced when rights to the loan are divvied up as securities?
      - rbranson 16y ago
        The relation is like a futures contract to a commodity. You are just trading an abstract thing, not the commodity itself. CDOs are bonds created by the corporations that hold the assets, not assets themselves.
        jeromec 16y ago
        Right, okay... so let's say I walked into my local bank and took out a mortgage, which was then sent to Bear Stearns, which then collapsed. JP Morgan Chase bought those assets, so I guess my mortgage would now be held by JP Morgan Chase...
        btilly 16y ago
        No, actually here is what probably happened. Bear Stearns created a small shell company with a detailed and interesting charter. They loaned this company a large sum of money, in return for a set of bonds. The company used that money to purchase the loans from Bear Stearns. At this point Bear Stearns owns bonds whose value is approximately that of the loans. (Actually slightly more because the bonds are structured to better meet investor's needs.) They then turned around and sold the bonds to investors. One of those investors (in theory it doesn't have to happen this way, but in practice it does) gets both the most risky piece of the investment, and a contract to run the company by rules specified in the company charter. That investor is called the servicer, and they are responsible for the day to day activities of the company. Which mostly consist of collecting loan payments, paying out the bonds, and making detailed records available to any properly qualified investor. Once the last loan is gone, the company has no assets and goes away. Your loan is now owned by the shell company (which has no employees and exists only to shovel income from loans and send them out again as bonds), which is run by the servicer. JP Morgan Chase did not purchase any connection to this company when they bought Bear Stearns unless Bear Stearns chose to keep some of the bonds. (They did keep some from many deals, and purchased some from deals they didn't do, so they may be an investor.) Control is with the servicer. However it should be noted that the servicer's hands are tied by the charter, and there is very little flexibility in how they can choose to run things. Also note that once the deal goes bad, the servicer's incentive is to run the deal in whatever way maximizes the servicing fees they get. This has proven to result in decisions that are counter to the interests of both investors and people who owe the loans. For instance renegotiating a lower loan that people can actually pay generates less in servicing fees than taking a loan through bankruptcy court. Therefore the servicer often prefers driving loans into bankruptcy even though that is worse for everyone else. Now do you see why this is a mess?
kqr2 16y ago
But the US government may still be guaranteeing a lot of their assets, in particular troubled mortgages and other toxic assets that might not be gone from their books. In 2008, this guarantee was for $306 billion. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYXG9i3RJRRk http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...
- jonknee 16y ago
  Sounds like that is included: > And the government will get even more money from its investment in Citigroup. The Treasury said it would reap a profit of $2.25 billion by selling all its Citigroup trust preferred securities, which it received for guaranteeing $301 billion in the bank’s most troubled assets. It expects that sale to be completed on Tuesday.
  - deleted 16y ago
    [deleted]
  - pigbucket 16y ago
    How does selling these trust-preferred securities relieve the Treasury of its obligations to guarantee troubled assets? (I ask because I don't know)
    - jonknee 16y ago
      Because they only sold the securities after the guarantee agreement was over: http://news.yahoo.com/s/nm/20100930/bs_nm/us_usa_citigroup_tarp http://news.yahoo.com/s/nm/20100930/bs_nm/us_usa_citigroup_t... > In a statement, the Treasury said it sold all of the trust preferred securities that it received in exchange for guaranteeing a pool of about $301 billion in Citigroup assets. The Treasury never made any payouts on the guarantee, which has been canceled.
- infynyxx 16y ago
  "In 2008, this guarantee was for $306 billion." Who knows how much billion of toxic assets are still under the banks' book because there is no standard method for determining those value. Remember during financial crisis, when Bear Stearns, Lehman, AIG and most TARP funded banks told, their value of toxic assets kept on rising. $306 Billion seems skeptical until there is some standard method of valuing those toxic assets.
jeromec 16y ago
By the time the government exits all the ownership stakes acquired by the bailouts -- banking industry, auto industry etc. -- there could be 100 billion plus in profits. That should go directly and immediately to more economic stimulus, to further counteract the economic damage caused in the first place.
- kelnos 16y ago
  I'd prefer it went to paying down a little of the national debt.
  - kls 16y ago
    I personally would like to see it go to help those that have verifiably lost their job due to this downturn, and are now facing foreclosure and devastation. We bailed the banks out, we should use any of those profits to bail out the innocent bystanders that got caught up in this mess and had no hand in creating it. I am not talking about those who over bought, I am talking about the underemployed that where employed in a career, had a history of reliable payments and just got caught in the cross fire.
  - jeromec 16y ago
    I'm trying to reply to this in a way which doesn't turn this political. The national debt will not be brought under control until government spending policy reflects that. Putting that money on the national debt is like paying down the credit balance on a reckless spending teen card holder; it doesn't really help the overall situation. This money is free and clear profit, so it looks to me like it should go right back into the economy immediately where it can be beneficial immediately. A bird in the hand and all that...
    - gwright 16y ago
      I'm not sure how you could ever manage to make $100 billion in government borrowing or spending not 'political'. If you reduce government borrowing by $100 billion that frees up $100 billion for use by the private sector. Quite a few people would argue that $100 billion in private investment via the free-market is a much better idea than $100 billion in dubious government projects selected via political horse trading.
aresant 16y ago
Wish the Gov't would push this money out as dividends to shareholders
- jeromec 16y ago
  In this case the shareholders are U.S. taxpayers due the dividends. So, let's say profits amount to 100 billion, and divide that by 300 million Americans. That's about a $333.00 rebate check. That certainly could help as economic stimulus. I'm all for it.
  - aresant 16y ago
    Precisely.
- pigbucket 16y ago
  I think dividends could only come from Citi, not from an investor; and part of the original deal was a limit on dividends, presumably for the sake of preserving a semblance of moral hazard in the course of a massive bailout.
  - Empedocles99 16y ago
    I think you are misinterpreting. The taxpayers are the investors, and the government is holding these (imaginary after we pay for 300 billion in failed mortgages) profits. The poster wishes these profits by the government, which taxpayers have invested in, to be payed out as dividends (tax refunds)
    - pigbucket 16y ago
      So "shareholder" doesn't mean Citi shareholder but rather taxpayers, and "dividends" doesn't mean dividends to Citi shareholder but tax refund to me. In that case, I share the wish, and admire the irony.
- jonhendry 16y ago
  Companies hemorrhaging red ink aren't in a good position to pay dividends.
callmeed 16y ago
so when the govt makes "a good profit from its investment" (according to the article) ... where are those profits applied? Surely not to lower my taxes slightly ...

30 points by donohoe 16y ago

And they are also planning to sell AIG and GM shares most probably with decent profit. And still, TARP will likely to be one of the main reasons for downfall of Democrats.

netmau5 16y ago

In a really roundabout way, the Fed is manipulating securities in much the same way Wall St did during the financial crisis. Only an entity with that much buying power could make such a vast investment with such incredible terms. It seems like they said, "we're gonna loan you a bunch of money and then you're going to owe us that much and then some back, and to protect our investment, we will make a guarantee to your solvency so our floor is profit."

jeromec 16y ago
The U.S. Treasury stepped in to prop up the banks (i.e. the financial system) with the Troubled Asset Relief Program or TARP. This was essentially taxpayers loaning money to banks in trouble which were threatening to bring down the entire financial system, since no one else would, in exchange for ownership in the banks. The Federal Reserve is not the same thing as the Treasury.
- jswinghammer 16y ago
  You're correct but the Federal Reserve took actions on its own to try to make the banks solvent and directed the treasury on its course of action. The Federal Reserve ended up with a bunch of garbage on its balance sheet as a result of this activity. We don't know to what extent because there is no full audit of the Federal Reserve's activities in this department (for our benefit of course). We do own the "Red Roof Inn" though so that's cool I guess. http://www.youtube.com/watch?v=pE3oiKuU8UI http://www.youtube.com/watch?v=pE3oiKuU8UI
  - jeromec 16y ago
    Yes, you're correct. The Fed I believe was forced to purchase many of the toxic securities directly. Many people don't understand just how severe and dire the situation was. One thing I'm not quite clear about is what happens at the individual home level with some of those securities. For each of the mortgages sent up to Wall St., who is the legal owner of it? I read somewhere that many of these mortgages were sitting in boxes in warehouses somewhere. If you've signed to repay a loan to a lender, how can those terms be enforced when rights to the loan are divvied up as securities?
    - rbranson 16y ago
      The relation is like a futures contract to a commodity. You are just trading an abstract thing, not the commodity itself. CDOs are bonds created by the corporations that hold the assets, not assets themselves.
      - jeromec 16y ago
        Right, okay... so let's say I walked into my local bank and took out a mortgage, which was then sent to Bear Stearns, which then collapsed. JP Morgan Chase bought those assets, so I guess my mortgage would now be held by JP Morgan Chase...
        btilly 16y ago
        No, actually here is what probably happened. Bear Stearns created a small shell company with a detailed and interesting charter. They loaned this company a large sum of money, in return for a set of bonds. The company used that money to purchase the loans from Bear Stearns. At this point Bear Stearns owns bonds whose value is approximately that of the loans. (Actually slightly more because the bonds are structured to better meet investor's needs.) They then turned around and sold the bonds to investors. One of those investors (in theory it doesn't have to happen this way, but in practice it does) gets both the most risky piece of the investment, and a contract to run the company by rules specified in the company charter. That investor is called the servicer, and they are responsible for the day to day activities of the company. Which mostly consist of collecting loan payments, paying out the bonds, and making detailed records available to any properly qualified investor. Once the last loan is gone, the company has no assets and goes away. Your loan is now owned by the shell company (which has no employees and exists only to shovel income from loans and send them out again as bonds), which is run by the servicer. JP Morgan Chase did not purchase any connection to this company when they bought Bear Stearns unless Bear Stearns chose to keep some of the bonds. (They did keep some from many deals, and purchased some from deals they didn't do, so they may be an investor.) Control is with the servicer. However it should be noted that the servicer's hands are tied by the charter, and there is very little flexibility in how they can choose to run things. Also note that once the deal goes bad, the servicer's incentive is to run the deal in whatever way maximizes the servicing fees they get. This has proven to result in decisions that are counter to the interests of both investors and people who owe the loans. For instance renegotiating a lower loan that people can actually pay generates less in servicing fees than taking a loan through bankruptcy court. Therefore the servicer often prefers driving loans into bankruptcy even though that is worse for everyone else. Now do you see why this is a mess?

kqr2 16y ago

But the US government may still be guaranteeing a lot of their assets, in particular troubled mortgages and other toxic assets that might not be gone from their books. In 2008, this guarantee was for $306 billion. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYXG9i3RJRRk http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

jonknee 16y ago
Sounds like that is included: > And the government will get even more money from its investment in Citigroup. The Treasury said it would reap a profit of $2.25 billion by selling all its Citigroup trust preferred securities, which it received for guaranteeing $301 billion in the bank’s most troubled assets. It expects that sale to be completed on Tuesday.
- deleted 16y ago
  [deleted]
- pigbucket 16y ago
  How does selling these trust-preferred securities relieve the Treasury of its obligations to guarantee troubled assets? (I ask because I don't know)
  - jonknee 16y ago
    Because they only sold the securities after the guarantee agreement was over: http://news.yahoo.com/s/nm/20100930/bs_nm/us_usa_citigroup_tarp http://news.yahoo.com/s/nm/20100930/bs_nm/us_usa_citigroup_t... > In a statement, the Treasury said it sold all of the trust preferred securities that it received in exchange for guaranteeing a pool of about $301 billion in Citigroup assets. The Treasury never made any payouts on the guarantee, which has been canceled.
infynyxx 16y ago
"In 2008, this guarantee was for $306 billion." Who knows how much billion of toxic assets are still under the banks' book because there is no standard method for determining those value. Remember during financial crisis, when Bear Stearns, Lehman, AIG and most TARP funded banks told, their value of toxic assets kept on rising. $306 Billion seems skeptical until there is some standard method of valuing those toxic assets.

jeromec 16y ago

By the time the government exits all the ownership stakes acquired by the bailouts -- banking industry, auto industry etc. -- there could be 100 billion plus in profits. That should go directly and immediately to more economic stimulus, to further counteract the economic damage caused in the first place.

kelnos 16y ago
I'd prefer it went to paying down a little of the national debt.
- kls 16y ago
  I personally would like to see it go to help those that have verifiably lost their job due to this downturn, and are now facing foreclosure and devastation. We bailed the banks out, we should use any of those profits to bail out the innocent bystanders that got caught up in this mess and had no hand in creating it. I am not talking about those who over bought, I am talking about the underemployed that where employed in a career, had a history of reliable payments and just got caught in the cross fire.
- jeromec 16y ago
  I'm trying to reply to this in a way which doesn't turn this political. The national debt will not be brought under control until government spending policy reflects that. Putting that money on the national debt is like paying down the credit balance on a reckless spending teen card holder; it doesn't really help the overall situation. This money is free and clear profit, so it looks to me like it should go right back into the economy immediately where it can be beneficial immediately. A bird in the hand and all that...
  - gwright 16y ago
    I'm not sure how you could ever manage to make $100 billion in government borrowing or spending not 'political'. If you reduce government borrowing by $100 billion that frees up $100 billion for use by the private sector. Quite a few people would argue that $100 billion in private investment via the free-market is a much better idea than $100 billion in dubious government projects selected via political horse trading.

aresant 16y ago

Wish the Gov't would push this money out as dividends to shareholders

jeromec 16y ago
In this case the shareholders are U.S. taxpayers due the dividends. So, let's say profits amount to 100 billion, and divide that by 300 million Americans. That's about a $333.00 rebate check. That certainly could help as economic stimulus. I'm all for it.
- aresant 16y ago
  Precisely.
pigbucket 16y ago
I think dividends could only come from Citi, not from an investor; and part of the original deal was a limit on dividends, presumably for the sake of preserving a semblance of moral hazard in the course of a massive bailout.
- Empedocles99 16y ago
  I think you are misinterpreting. The taxpayers are the investors, and the government is holding these (imaginary after we pay for 300 billion in failed mortgages) profits. The poster wishes these profits by the government, which taxpayers have invested in, to be payed out as dividends (tax refunds)
  - pigbucket 16y ago
    So "shareholder" doesn't mean Citi shareholder but rather taxpayers, and "dividends" doesn't mean dividends to Citi shareholder but tax refund to me. In that case, I share the wish, and admire the irony.
jonhendry 16y ago
Companies hemorrhaging red ink aren't in a good position to pay dividends.

callmeed 16y ago

so when the govt makes "a good profit from its investment" (according to the article) ... where are those profits applied? Surely not to lower my taxes slightly ...