Citi Rescue Close

A: Don't want to talk too much about this because I laid out my thoughts on Friday in the "Citi's Death Bed" piece. As I said then, the most likely options were an AIG type rescue, a capital injection from TARP directly into Citibank, or the purchase of distressed assets by TARP from Citi's books. It appears a combination of the last two concepts will be the path taken, in a 'good bank / bad bank' type of rescue structure. We should hear an official announcement soon on what is quickly becoming, "just another bailout Sunday".

The news from Charlie Gasparino over at CNBC.com:

The U.S. government and Citigroup are working feverishly to hammer out a rescue plan for the beleaguered bank. The exact nature of plan remains unclear, but the government is leaning towards some sort of cash infusion into Citigroup. The plan will probably be a multi-layered one, which means the government could backstop losses on Citigroup's troubled assets as well. In exchange, Citi may issue preferred stock to the government.

While the Fed could buy more than $100 billion or more in the bad assets if the plan goes through, that doesn't mean it will pay Citi $100 billion, depending on the final valuation of those assets. According to people with knowledge of the discussions, the plan for Citi resembles the original TARP proposal, in which the government would buy bad assets for financial firms at some price higher than what's being offered in the market.

Citi is so large, and interconnected with the global financial system, it cannot be allowed to fail. However, stockholders should understand that they are the lowest class on the todem pole, and that the share price and their dividend are at high risk should any substantial rescue take place. Time will tell and who knows which way this could go in such a crazy market.

One thing is for sure if any deal is reached:

a) management changes should be announced immediately
b) elimination of the dividend

With the stock price trading under $4, time has run out and something had to be done. Investors had enough, pushed Pandit into a corner, and called the hand. Now its time to see what the government does to keep Citi alive, and how Citi may look after a deal is reached.