
Treasury Reaps Billions as It Sells Citi Shares - donohoe
http://dealbook.blogs.nytimes.com/2010/09/30/treasury-reaps-billions-as-it-sells-its-citi-shares/?src=twr
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kqr2
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...](http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYXG9i3RJRRk)

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jonknee
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.

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

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jonknee
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...](http://news.yahoo.com/s/nm/20100930/bs_nm/us_usa_citigroup_tarp)

> 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.

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jeromec
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.

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

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jeromec
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...

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gwright
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.

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_delirium
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.

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gwright
* 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.

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netmau5
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."

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jeromec
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.

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jswinghammer
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>

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jeromec
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?

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rbranson
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.

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jeromec
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...

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btilly
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?

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

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btilly
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...](http://www.americanbanker.com/mortgage_serv/top-subprime-
servicers-at-123109-1018661-1.html) 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.

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jeromec
Thanks for the info. :)

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callmeed
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 ...

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

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jeromec
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.

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aresant
Precisely.

