Treasury Reaps Billions as It Sells Citi Shares | Hacker News Reader

Treasury Reaps Billions as It Sells Citi Shares

dealbook.blogs.nytimes.com

30 pointsdonohoe37 comments

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=a...

That's an excellent point. Talk of the Govt. making a profit is nonsense until it's clear how much loss on those assets it ends up absorbing. According to that Bloomberg piece, though, Citi was supposed to cover the first $29B of losses, so that plus earned dividends plus the relatively paltry share value appreciation means there's a bit of a buffer for the Govt.

exactly. And even if the government is able to inflate away the horrific losses its trying to hide from us in the mortgage market, how much these paper profits will ultimately cost all of us is what matters.

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.

How does selling these trust-preferred securities relieve the Treasury of its obligations to guarantee troubled assets? (I ask because I don't know)

Because they only sold the securities after the guarantee agreement was over:

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.

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.

I'd prefer it went to paying down a little of the national debt.

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...

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.

That $100b doesn't get really "freed up", at least not entirely, and certainly doesn't go directly to the private sector. Part of it more or less gets destroyed: among large institutions, federal debt instruments, especially short-term, are treated as something close to cash. The government buying it back (by paying down the debt) takes that quasi-cash out of circulation, deflating the money supply. In effect, the government uses $100b of one kind of money to destroy $100b in quasi-money.

* The government buying it back (by paying down the debt) takes that quasi-cash out of circulation, deflating the money supply. *

We aren't talking about paying down the debt. We are talking about borrowing less money this month than we did last month because we just sold our shares in Citibank and so we've got a few billion in cool cash lying around. The total debt continues to go up, just at a slower rate.

From the credit market's point of view, the US govenment just sold a few billion less in bonds this month (as compared to last month) and so that means that the creditors have a few billion more to invest elsewhere.

The private sector isn't actually putting money to use at the moment.

I'm not sure how you could ever manage to make $100 billion in government borrowing or spending not 'political'.

Because this $100 billion is not being borrowed or spent. The borrowing has already occurred and has been spent (in this case invested). This $100 billion is a separate unaccounted for number -- one of profit. It's not inherently part of a partisan issue, like the expiring Bush tax cuts, for example.

If you reduce government borrowing by $100 billion that frees up $100 billion for use by the private sector.

No it doesn't. The private sector is free to borrow as much as it likes from banks at any time. The only impacting factor might be on interest rates and inflation, but those are reflective of other factors as well.

If private investors purchase $100 billion in US bonds, that is $100 billion in cash that is not available to be invested elsewhere (i.e. in the private sector). When government borrowing goes down the cash flows to other investments it doesn't just sit there waiting for Uncle Sam to change its mind. Nor is available cash created out of thin air just because the US government wants to sell more bonds.

Obviously the size of the credit market changes over time but in the short term, public and private interests are competing for the same pool of available cash.

That's a very good point. And given that the US national debt is well in excess of $10 trillion, a $100 billion reduction won't do all that much, short term or long term. Sustainable fiscal policy is the only real solution.

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.

Anything that grows GDP faster than the interest on the debt reduces the debt burden. Considering the interest rate on Treasuries is not far from zero right now, that isn't hard in this environment.

Agree in the long-term about the need for sustainable fiscal policy.

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."

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.

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

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?

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.

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...

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?

Wow... I think I've got it all, but could you give an example of who would be a "servicer"?

I haven't been in the bond business since 2003, nor did I deal with servicers then, nor did I deal with user loans. Therefore I don't know the names.

However it looks like http://www.americanbanker.com/mortgage_serv/top-subprime-ser... can give you a bunch of the names and how much servicing they do. I can guarantee you that they will be a bunch of companies you've never heard of from all over the country. Except that if you have one of these loans, then you're familiar with the one who is servicing your loan.

Thanks for the info. :)

This is awesome info. Thanks!

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 ...

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

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.

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)

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.

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.

Precisely.

Companies hemorrhaging red ink aren't in a good position to pay dividends.

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