Monday, November 24, 2008

A more sensible idea: A Citigroup pre-pack bankruptcy


It looks more and more like Citigroup is going to the Federal Government for help (something that neither Washington Mutual nor Wachovia did).  

In the WaMu and Wachovia cases Sheila Bair either confiscated or forced a transaction against the wishes of management and without a management approach to government requesting help.

When Citigroup does go to the Feds then the case for confiscation is MUCH stronger than it was with Washington Mutual.  Washington Mutual management still thought they could survive and they were still liquid. 

That said – I don’t think WaMu should have been confiscated and I do not think Citigroup should be confiscated in the same way either.  The problem with the WaMu confiscation is not that it wiped out my preferred (tough John), it was that it wiped out debt that had a reasonable right to think that it would get something in a liquidation. 

I think the confiscation of WaMu eventually doomed Citigroup (for which Sheila Bair should resign).  

But she has a chance to make good.  

I suggested in my quickly infamous confiscation post that Sheila Bair might just confiscate Citigroup and leave the holding company with nothing but its debt, debenture, preferred and equity liabilities.

The case for doing this is strong – much stronger than when she recklessly confiscated Washington Mutual.  

But I can suggest better.  You can confiscate Citigroup and treat the debtholders fairly.

You wouldn’t want to merge Citigroup with anything and have the debt assumed.  Banks that big we have discovered are globally dangerous.  If anything you would want to split it.  But for the moment mere survival would be adequate.

So here goes for a suggestion:

If (and only if) Citigroup comes looking for assistance then Sheila Bair should confiscate it.  

However…

When she does the holding company will file bankruptcy – and she should offer them a prepackage bankruptcy option option.  If they agree to convert all the debt to equity in the New Citigroup with the preferreds and junior debentures getting way out of the money options then she will gift the company that she has restructured  back to the old (and now restructured) Citigroup holding company.  The bond holders would it appears have no choice to accept.

They would get what they deserve  – and what the confiscation of WaMu denied them – first claim on the residual value of Citigroup.

This would not solve Citigroup’s liquidity problems (though converting 184 billion of debt to equity would solve the capital problems).  

To solve the liquidity problems Sheila should guarantee say 400 billion of unpledged Citigroup assets beyond the first 50 billion in losses.  She should extract a fee for this (say 10% ownership of the new Citigroup).  And Citi should be expected to repo finance the said pool of assets to get cheap funding.

After that she should do the same for any other major bank that comes through the door.  It will be most of them…




John Hempton

1 comment:

Jonathan said...

Another excellent post. Thank you.

Could someone please help me understand this sentence, by explaining it a bit more fully (I do not understand "repo finance").

"And Citi should be expected to repo finance the said pool of assets to get cheap funding."

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