Good Bank, Bad Bank, and Fucked Bank

Apparently Citibank and the U.S. government (i.e., we taxpayers) have reached a deal whereby we will backstop something like $300-billion in screwed assets on Citi’s balance sheet. That $300-billion figure is, as we say in the business, way fucking bigger than the $50-billion "bad bank" number that had been tossed around earlier in the weekend.

Here is the gist:

  • Citi will carve out $300-billion in troubled assets, which will remain on its balance sheet
    • The first $37-$40-billion in losses on those assets will go to Citi
    • The next $5-billion in losses will hit Treasury
    • The next $10-billion in losses will go to the FDIC
    • Any more losses will go to the Fed
  • There will be no management changes at Citi, because, you know, they are all fine and upstanding people who have done nothing wrong
  • There will be some compensation limitations, but those have not yet been made clear

To be clear, this is not a "bad bank" model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers. In other words, we are, given the size and nature of the maneuver, creating a new variant on the good/bad bank model that I hereby christen "fucked" bank. You do that, of course, when removing all the toxic assets from a "good" bank’s balance sheet would leave no bank behind at all.

I’ll have more when there is more, and I know the equity futures markets like it — it’s admittedly less terrifying that letting Citi fail — but so far I’m not impressed.

More here at the WSJ. And, relatedly, a super post here by Yves Smith about how, in our obsession with banks and finance, we have become utterly indoctrinated, and our regulators subject to cognitive capture.

[Update] Here is the term sheet. I generally discount all the preferred terms -– 8%, etc. –- because, as we have seen in prior cases (read: AIG), those aren’t likely to stick anyway.