Last week, we predicted the BCEprivatization will go through Dec. 11, despite a lack ofinvestor confidence.
Then on Monday, the U.S. TreasuryDepartment said it would buy US$20 billion worth of Citigroup Inc.preferred shares and protect it from investment losses.
Citigroup’sfinancial health is important to the BCE deal because it is one of fourbanks that promised earlier this year to loan the consortium buying BCEabout US$30 billion.
The companiesplanning to buy BCE — Ontario Teachers’ Pension Plan, ProvidenceEquity Partners Inc., Madison Dearborn Partners, LLC and Merrill LynchGlobal Private Equity – will need to spend about $50 billion topurchase all outstanding shares of firm, in a deal initially announcedin June, 2007.
The other banks involved in financing theleveraged buyout are TD, Deutsche Bank and Royal Bank of Scotland. Noneof the banks have announced plans to back out of the agreement.
Asof Sept. 30, Citibank had US$63 billion in cash and US$78.7 billiondeposited to banks. It has $693 billion loaned out. All figures are inU.S. currency.
In announcing its $20 billion purchase ofCitigroup stock, the U.S. Treasury Department, along with the FederalDeposit Insurance Corporation, said it would “provide protectionagainst the possibility of unusually large losses on an asset pool ofapproximately $306 billion of loans and securities backed byresidential and commercial real estate and other such assets …”
The announcement was part of the Troubled Asset Relief Program (TARP), which wasstarted in October. TARP was a by-product of the U.S. EmergencyEconomic Stabilization Act, which was initially intended to give thegovernment authority to buy mortgages but then expanded into a programto buy bank shares.
Now the U.S. government plans to investUS$700 billion into companies whose balance sheets got clobbered by thehousing crisis that started last year when millions of homeownersforeclosed on their subprime mortgages, at a time when the averageprice of homes in 10 major American cities had dropped 18 per cent in ayear.
In October, Citigroup announced its total assets haddropped by $308 billion since the third quarter of 2007. It laterannounced 50,000 job cuts. This is in addition to 23,000 positionsalready eliminated this year. Though Citigroup lost $2.8 billion in thethird quarter, it was not an actual loss of cash but it took charges of$8.9 billion on “provisions for loan losses.”
Citigroup has published its detailed financial statements here.http://www.citigroup.com/citi/fin/data/qer083s.xls
Ina nutshell, of the $717 billion the bank has loaned out, executives areguessing creditors will probably stiff the bank for $24 billion, whichis recorded on its balance sheet as “allowances for loan losses.” Thisfigure has nearly doubled from $12.7 billion over the past year.
Allof this to say, of the hundreds of billions of dollars loaned out overthe years, Citigroup doesn’t expect to get all of it back but won’necessarily stop lending money.
As we said last week, we don’tprovide investment advice and are not willing to go so far as to betmoney the deal will go through. If it does, it remains to be seen howmuch money BCE can raise to invest in its infrastructure, given theleveraged buyout’s $50 billion price tag.