Did the Federal Government Make Money Bailing Out Citigroup?

The Washington Post is anxious to tell its readers that the government made a profit on its bailout of Citigroup. This claim gives a whole new meaning to the notion of "profit." The government gave enormous amounts of money to Citigroup through various direct and indirect channels. It is only getting a portion of this money back in its "profits," the rest is going to Citigroup's shareholders (e.g. Robert Rubin) and its millionaire executives who are highly skilled at getting the government to hand them money.

First, it is worth noting how the government got the shares of common stock which it is now selling for a profit. On November 23, 2008, the government bought $20 billion in preferred shares in Citigroup. It also received another $7 billion in preferred shares in exchange for guarantees on $300 billion in bad assets. At the time, the combined value of the investment in preferred shares and the guarantee on bad assets exceeded the full market value of Citigroup stock on November 21st, the last trading day prior to the deal. In other words, for the same financial commitment that the government made on that day, it could have owned Citigroup outright.

The government subsequently held onto to its preferred shares until Citigroup's stock had nearly tripled in value. In September of last year it traded its preferred shares for common shares that were priced at a level that only give the government a 27 percent stake in Citigroup. These shares have have now risen enough to give the government an $8 billion profit on its investment. While the Post tells readers that:

"The windfall expected from the stock sale would amount to a validation of the rescue plan adopted by government officials during the height of the financial panic, when the banking system neared the brink of collapse. A year ago, Citigroup's stock hovered around a dollar a share, and the bank's future seemed in doubt. On Friday, the stock closed at $4.31."

The logic of the Post's assertion that the profit on Citigroup stock validated the bailout is not clear. By making capital available to Citigroup at below market rates, the government effectively subsidized the income of Citigroup's shareholders. It also allowed its top executives to make millions of dollars because they were smart enough to be able to get taxpayers to subsidize the bank. The current market value of Citigroup is $123 billion, with only $33 billion belonging to the government. This means that the government has effectively given $90 billion (@ 25 million kid-years of health care provided through the State Children's Health Insurance Program or SCHIP) to Citigroup's shareholders and billions more to its executives by not demanding a market price for its support.

It is also worth noting that the government has supported Citigroup through other mechanisms. The Fed created various special lending facilities that allowed Citigroup to borrow money from the government at extremely low interest rates. Since one of the main uses of this money was buying government bonds, Citigroup was essentially getting free money from the government. If it borrowed $200 billion at near zero interest and lent it back to the government by buying 10-year Treasury bonds at 3.7 percent interest, then the government was effectively handing Citigroup $7.4 billion a year for nothing. This money is not deducted from the Post's estimate of the government's "profit" on its dealings with Citigroup. (The Fed refuses to tell the public how much money it lent to Citigroup and other banks at below market rates.)

It is possible that the losses at Fannie Mae and Freddie Mac, as well as the Federal Housing Authority (FHA), may also have helped to subsidize Citigroup's profits. Fannie and Freddie lose money when they pay too much to banks to buy mortgages. It is likely that Citigroup was one of the banks that Fannie and Freddie overpaid for mortgages. Similarly, the FHA loses money when it guarantees mortgages without charging a high enough insurance fee. It is likely that many of the mortgages that the FHA guaranteed, which went bad, were issued by Citigroup.

It is also worth noting that government policy has helped to boost Citigroup's profitability in other ways. Citigroup is at the top of the list of "too big to fail" institutions. This has allowed it to continue to borrow money from the private investors at interest rates that are far below the rates it would have to pay if it did not rely on a guarantee of support from the nanny state.

Also, the government's efforts to support the economy more generally have proven a boon to Citigroup. Specifically, by pushing down interest rates it has enormously raised the value of the loans on Citigroup's books. The value of long-term loans rises substantially when interest rates fall. If the Fed's program of buying mortgage-backed securities lowered the interest rate on 30-year mortgages from 5.5 percent to 5.0 percent, then this would raise the value of Citigroup's outstanding 30-year mortgages by more than 7 percent. If Citi had $500 billion invested in mortgages or related assets, then the action by the Fed would have effectively given Citi $35 billion.

If the Fed subsequently resells the $1.25 trillion in mortgage-backed securities it purchased in order to push down mortgage interest rates in an environment in which interest rates have risen, then it will lose money on these purchases. If it sells the mortgage-backed securities when interest rates are 6 percent, then it will lose close to 15 percent, or more than $180 billion on its purchases of these mortgages.

In telling readers that the profit on Citi stock "would amount to a validation of the rescue plan adopted by government officials during the height of the financial panic" the Post is ignoring all the other costs born by the government in allowing Citigroup to be restored to viability. It is also ignoring the enormous handout of taxpayer dollars to some of the richest people in the country. This is not good reporting.

--Dean Baker

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