Wall Street Whispers: Taxpayers Overpaid in Citi Bailout

Chris Hondros/Getty Until the extent of “bad bank” assets are counted and valued, taxpayers will stay in the dark and on the hook.

Despite a financial rescue that could end up costing taxpayers billions and billions of dollars, the US government still has not come clean on the value of the mortgage-related toxic assets on the books of Citigroup, the banking behemoth.

The word buzzing through the canyons of Wall Street during the Thanksgiving holiday, according to my sources, was that the $306 billion of assets that we—the American taxpayer—guaranteed for Citigroup a week ago actually have a market value closer to $230 billion, not $306 billion. The guarantee for a “bad bank” of ringed assets was part of the eleventh-hour rescue plan that Treasury Secretary Hank Paulson engineered with Robert Rubin, his predecessor at Treasury and Goldman Sachs, and a Citigroup senior executive and board member, whereby another $20 billion from the Troubled Asset Relief Program went to Citigroup—on top of a previous $25 billion. Citigroup will assume the first $29 billion in losses on the risky pool of assets, with any remaining losses absorbed 90 percent by the government and 10 percent by Citigroup. The firm’s stock has soared some 122 percent since the announcement, opening this week at $8.29 per share (and closing Monday at $6.45, down 22 percent).

If the Citigroup assets we just guaranteed are only worth $230 billion, then for starters the American taxpayers have just flushed $42.3 billion down the drain.

Of course, had the government agreed to value the assets for what they were really worth—the $230 billion—Citigroup would have had to write off the $76 billion difference against its equity account, effectively bankrupting the world’s most pervasive symbol of American capitalism. Apparently there was way too much at stake to allow that to happen, proving, yet again, that in war the first casualty is always the truth.

Moreover, if the assets we just guaranteed are only worth $230 billion, then for starters the American taxpayers have just flushed $42.3 billion down the drain in a week. (The math is 90 percent of $76 billion minus $29 billion.) And if Citigroup’s balance sheet is still not marked properly, then the $45 billion of equity that Paulson just took from the TARP for Citigroup may also be shaky. The chance that almost $90 billion is now at serious risk is a rather unsettling thought.

Indeed, when all is said and done in this financial crisis, one of the many underlying causes of it—along with rampant greed and an acute absence of regulatory oversight—has been the ongoing lack of transparency. The government’s actions with regard to Citigroup merely compound this problem.

Right from the start, as toxic mortgage securities began to clog the arteries of the system, no one dared value them at anything close to what they suspected they were really worth. People deluded themselves into thinking that as long as the securities didn’t trade, their true value could be hidden from investors. No trading meant no requirement to mark-to-market. Mark-to-myth became the new mantra of Wall Street. But, as is now crystalline, nearly every firm in the securities industry that was a leader in manufacturing and distributing mortgage securities—among them Bear Stearns, Merrill Lynch, Citigroup, and Lehman Brothers—was bankrupt, or close to it, as soon as the huge losses in the Bear Stearns hedge funds became apparent to the outside world in May 2007.