The Stock Thread

[Muddy]

If I was not in school right now, your door bell would be ringing!

[Live.2.Fish]

WOW, this is quite a discussion. (this is the first time I've read this thread). As I read this, the FDIC Insurance comes up a few times. In my opinion, FDIC is the biggest half-truth out there. Sure, it used to say that your bank account was covered up to $100,000, now $250,000, but that is only half the truth.

I see it every day. The FDIC sign in the bank says that I'm only covered up to $250,000, so that's all I can put in that bank.

Take a "typical" family for example. Mom, Dad and two children (Jack & Jill). They could easily have their money in their accounts Insured at ONE bank for $2.5 Million.. More, if you get a little more creative.

This is how one would title each account to get your money covered.

Mom & Dad with a Joint account: Insured for $500,000. ($250k for each owner of the account)

Mom POD (pay on death) Dad: Insured for $250,000 ($250,000 per owner (Mom) per beneficiary (Dad)

Dad POD Mom: Insured for $250,000 ($250,000 per owner (Dad) per beneficiary (Dad)

Mom & Dad POD Jack & Jill Insured for $1,000,000 ($250,000 per owner (Mom & Dad) per beneficiary (Jack & Jill) Each owner has two qualified beneficiaries at $500,000 x two owners = $1 million.

Mom (single account) Insured for $250,000

Dad (single account) Insured for $250,000

So that brings your total coverage at ONE bank to $2,500,000. Now, it's possible to increase this insured limit, but this is just a generic outline showing that the insurance from the FDIC is more that what's on the sign.

P.S. If you are lucky enough to have more cash, Do this at at couple of other banks and you now have a LOT of Insurance.

No one has ever lost one penny of FDIC Insured money when a bank fails.

[roadwarrior]

Well now, suprisingly, Micro may regain some credibility.

I expected CITI Group to be nationalized, not bailed out

with management intact. Over the weekend or early this

morning, the Feds agreed to inject 326 BILLION dollars

into this insolvent institution and announced their intention

to allocate 7.6 TRILLION dollars in combined relief! I don't

think that includes the automobile companies, but what's a few

trillion among friends?

So, although the economy still teeters on depression, 7.6 trillion

dollars may support a DJIA above 7000. We are currently just 37

points BELOW Micro's 8500 "rock bottom". Later today or

tomorrow we may bump our heads breaking through the floor!

Speculators should rejoice, investors run and hide.

:

[tyrius.]

Over the weekend or early this morning, the Feds agreed to inject 326 BILLION dollars into this insolvent institution

I don't think that your statement is factually correct.

The feds are injecting $20 billion into Citi and then guaranteeing $306 billion of assets (the second part is not an injection of capital).  

The first $26 billion of losses on the $306 billion of guaranteed assets are on Citi and not the fed.  After that first $26 billion then Citi owns 10% of the remainder of losses.  So, in the EXTREMELY unlikely event that these assets become worth absolutely nothing the feds would have lost $272 billion (306-26=280*.9=252+20=272).  For payment of this guarantee the feds get $7 billion in preferred stock with an 8% dividend.  The gov't is also getting warrants 254 million shares of common stock with a strike price of $10.61.

[Micro]

So, although the economy still teeters on depression...

:

To each his own, I guess.

As much as I think you're a lousy economist, RW, you are persistent.  

[Micro]

I don't think that your statement is factually correct.

The feds are injecting $20 billion into Citi and then guaranteeing $306 billion of assets (the second part is not an injection of capital).

Alas!  Just when I think no one gets it...

[Hoover]

Kent, this is a great thread you started.  Many are making interesting comments.  I too am very concerned about the nationalization of our economy.  Anyway, I am ready to buy, but not in a falling market.  The bargains will be their on the upside too.  I'll start buying when I see some reduction in volatility and a rising market.  Thanks to everyone for their input.

[roadwarrior]

Well, the actual cost is difficult to nail down, but the checkbook is wide open! The biggest issue regarding government ownership or partial nationalization is leaving current management and the Board of Directors in place. Obviously, they have not provided the leadership, guidance or oversight needed under their charge.

As we move forward, the next big hurdle is the auto industry, but financials are not out of the woods. We still don't know "what's behind the curtain".  

[tyrius.]

Well, the actual cost is difficult to nail down, but the checkbook is wide open!

Definately true.  The actual cost for this deal won't really be known for 10 years (the length of the residential guarantee), but it will be less than $326 billion.  The cost will also be offset by the dividend payments on the $7 billion of preferred stock.  8% of $7 billion is what $560 million a year?  So over the 10 year guarantee period the gov't will get $5.6 billion in interest payments or have their $7 billion in preferred stock bought back.

[Siebert Outdoors]

What are the tax payers actually getting out of this?

[moby bass]

What are the tax payers actually getting out of this?

A hosing! >

[tyrius.]

What are the tax payers actually getting out of this?

A functioning financial market and an attempt to remove fear from the market which leads to irrationality and companies like Citi going bankrupt.

The banks are one industry where there customers can take their assets leaving them incapable of doing business.

[tyrius.]

What are the tax payers actually getting out of this?

A hosing! >

Actually, if these companies survive the times and become successful again then the gov't will end up making money on many of these deals.

[Siebert Outdoors]

What are the tax payers actually getting out of this?

A hosing! >

Actually, if these companies survive the times and become successful again then the gov't will end up making money on many of these deals.

How?  This is the answer I was looking for but my question was extemely poorly worded.  Do they own stock or something in the company?  Maybe a loan at a set %?  

[tyrius.]

How? This is the answer I was looking for but my question was extemely poorly worded. Do they own stock or something in the company? Maybe a loan at a set %?

Actually, I tried to explain this in one of my earlier responses.  It's not easy to boil it down to English.  

Let's take the Citi deal.  The gov't is guaranteeing $306 billion of Citi's assets.  As payment for that guarantee they received $7 billion of preferred stock that pays an 8% dividiend.  So, depending upon what the losses are on those assets (Citi is on the hook for the first $26 billion of losses) are the gov't may make money on the interest or on selling the preferred stock.  

As part of the capital infusion Citi granted the gov't 254 million stock warrants.  These stock warrants have a strike price of a bit over $10.  So, if Citi's stock rises higher than $10 then the gov't can buy 254 million shares and sell them for the difference between the current price and the stock price.  For example, if Citi's stock price rises to $20 a share then the gov't can make $10 a share on 254 million shares which would be about $2.5 billion dollars.

So, in essence the gov't makes money on the "interest", really dividend, payments on the preferred stock and they own the two assets which are the preferred stock and the stock warrants.  Both assets would rise in value if Citi recovers strongly.

[Siebert Outdoors]

Thanks Tyrius.  Sounds like they are investing just like me and you.  Just alot larger amount.  

In reality if citi turns it around and becomes a productive company the Gov could actually make some money.

Maybe they would put it toward the national debt. ;D

[farmpond1]

Well, 1993 was a couple of years before the *** Bubble (1995-2001),

but Muddy's friends may have been caught up in some of that. A lot of people

lost everything.

We are at the beginning of a worldwide recession, not in the middle or near the end.

Individual stocks and indices will fall much further before recovery begins. Save

your powder until everyone else cashes in their chips.

8-)

I'm no investment or economics whiz but if everyone buries their money in the back yard or hides it under the mattress, won't we indeed have the "big crash" everyone fears?  I tend to believe that we should all behave cautiously optimistic and let things sort themselves out the way they ought.  The days of free/easy credit probably ought to be over anyway.

[roadwarrior]

tyrius,

Excellent explanation!

The deal seems reasonable when compared to Warren Buffet's recent

GE and GS deals. Of course the major difference is the "guarantees"

which were not any part of Berkshire transactions. What bothers me

is leaving the management and board of directors intact.

[tyrius.]

Of course the major difference is the "guarantees"

which were not any part of Berkshire transactions. What bothers me

is leaving the management and board of directors intact.

Yeah, the guarantee is a major difference and signals a big change in the Fed's direction in dealing with this crisis.  This is the first that they had done that and the Fed today announced that they are going to actually be buying mortgage backed securities.  Something like $800 billion worth I think.

I look at the guarantees as an insurance policy that the gov't is now selling.  The good thing is that they are selling them and not just giving them away!

[Siebert Outdoors]

What bothers me

is leaving the management and board of directors intact.

AMEN!!

[roadwarrior]

Here's a summary from Bloomberg:

Citigroup Bailout Charts New Course for U.S. Government Rescues

2008-11-25 05:01:00.14 GMT

By Craig Torres and Robert Schmidt

    Nov. 25 (Bloomberg) -- The U.S. government's emergency rescue of Citigroup Inc. offers a new model for bank bailouts:

explicitly insuring against losses on toxic assets, with taxpayers footing the bill.

    The Citigroup plan extends the federal commitment beyond the previous framework of capital injections from the Treasury and credit from the Federal Reserve. Now, the U.S. is a partner in the performance of $306 billion in real-estate loans and securities, sharing losses beyond $29 billion on what are likely to be some of Citigroup's worst holdings.

    “Everybody and his brother has got to have their hand out now,” said Eric Hovde, chief investment officer at Hovde Capital Advisors, which manages $1 billion in financial-services stocks. “The whole problem is so much bigger and deeper than the Fed and Treasury ever understood.”

    Taxpayers are likely to be at greater risk from the new template, which may be used to help more companies as debt writedowns continue to climb, analysts said.

    “Every situation will need to be evaluated on a case by case basis, but obviously we are able to draw from our experiences as we work through these issues in the financial system,” Treasury spokeswoman Brookly McLaughlin said.

    Citigroup's crisis escalated as it was forced to take on its balance sheet a number of special units created to invest in riskier securities. The New York-based bank's shares lost 60 percent last week, and then recouped some of those losses yesterday after the government's rescue. Other lenders remain vulnerable.

                         Weakened Banks

    Wells Fargo & Co. is absorbing Wachovia Corp., the bank that regulators pushed in September to merge amid mounting losses from $120 billion in a portfolio of home loans. Bank of America Corp. has taken on both Countrywide Financial Corp., once the biggest independent mortgage lender, and Merrill Lynch & Co., the securities dealer hobbled by $24 billion of losses.

Morgan Stanley slumped almost one third in the past three months.

    Other banks “are going to show up” and ask for the Citigroup deal, predicted Joseph Mason, a professor at Louisiana State University in Baton Rouge who previously worked at the Treasury's Office of the Comptroller of the Currency.

    The loss-sharing plan is another twist in the saga of Treasury Secretary Henry Paulson's management of the $700 billion Troubled Asset Relief Program. Since the rescue fund was approved by Congress and enacted last month, Paulson has been criticized by lawmakers and others for not having a clear design for using the money. President-elect Barack Obama joined the chorus yesterday.

                    ‘Confusion' on Strategy

    There has been “confusion on what the overall direction might be” of the Bush administration's plans, Obama said in a press conference in Chicago. At the same time, he pledged to “honor the commitments” of the outgoing team.

    “The model is that there is no model,” said V. Gerard Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. “It is an improvisation battle plan.”

    Under the terms of the agreement, Citigroup will cover the first $29 billion of pretax losses from the $306 billion asset pool, in addition to reserves it already set aside.

    Citigroup will accept 10 percent of losses above that amount, with the government responsible for 90 percent. The Treasury is second in line, taking $5 billion in losses, and the Federal Deposit Insurance Corp. is third, absorbing up to $10 billion. If the portfolio plummets through those triggers, the Fed steps in with a loan for the remaining assets.

                      Initial $25 Billion

    U.S. authorities acted after the second-biggest U.S. bank by assets touched $3.05, the lowest level since 1992, threatening confidence among its depositors and counterparties.

Citigroup had already received a $25 billion infusion under Paulson's $250 billion capital-injection program.

    “The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn't been easy,” said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. “If we don't keep the financial system going that is going to impose costs on the American public that will be real and palpable.”

    The Fed's exposure in the deal also represents a tack in the way the central bank has approached the crisis.

    Since what was an effective purchase of $29 billion Bear Stearns Cos. assets in March, Fed officials have shown a preference for providing short-term credits for firms facing a cash squeeze.

                         Assets Swell

    The central bank's balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

    Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds.

    Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to

$52.5 billion in loans to help American International Group Inc.

wind down its portfolio.

    “It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo.

“It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”

[Siebert Outdoors]

still no one loses their executive seat with these companies. Fire them all!!!!!!!!

[moby bass]

I'm sorry but I feel the government has absolutely no business using taxpayer dollars for any bailout of any company for any reason. Companies fail all the time and if the ones currently in the news can't be managed any better than they are, close.  Maybe stockholders should demand greater accountibility from the CEO's rather than putting taxpayers on the hook.  There is nothing in the U.S. Constitution that gives the federal government any authority to do what they are doing.  We have set some very dangerous precedents here to save some badly mismanaged companies with no repercussions on the part of management.  I understand the politicians politically expedient desire to save the companies and thus the country,although I don't believe the politicians are in it for any other reason other than to garner more power and control.  I don't entirely blame companies and banks for their problems because the government is partly to blame for constantly changing the rules of the game and implementing new regulations which make it very difficult, if not impossible, in some cases, to conduct business.

The Constitution limits the power of the Federal government by specifically stating that the powers not specifically outlined in the Constitution are reserved for the States.  For years, Congress has usurped power that wasn't theirs and are continuing to do so now.

Just my humble opinion and I now return the soapbox to someone else

BTW, just to put in perspective, how much $7 trillion is. The height of a stack of 1,000, $1,000 bills (1 million dollars) is 4.3 inches in height.

The height of a stack of $1,000 bills totaling 7 trillion dollars is over 475 miles high.  Not exactly chump change.

[tyrius.]

We have set some very dangerous precedents here to save some badly mismanaged companies with no repercussions on the part of management.

These precedents were set long ago.  The last time was the last bailout of the auto manufacturers and that is only one example.

[Siebert Outdoors]

wasnt that chrysler in 92?