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Insider Rumors: Citi Terms In Detail

We cherish our readers. They send us tasty treats on a regular basis. Like the purported Citigroup termsheet:
Says one loyal reader:

While I have not seen any details around the $309bn in assets being guaranteed as part of the C transaction, I would hope that these are AAA or at least AA rated MBS. As the Fed has been lending against these types of assets under the TSLF and PDCF since at least mid September, it is a bit perplexing how the transaction makes sense. The only way I can get my arms around it is that the Fed was no longer comfortable with its advance rates against the collateral and required C to pony up what is essentially a margin call. Help me out with the logic if I am missing something but:

  • C has $309bn in MBS assets. The Fed is likely advancing ~97% on these assets right now under TSLF and/or PDCF.
  • Fed has reduced this advance rate from 97% to 90%, which leaves a $20bn hole (7% * $309bn)
  • Fed takes $20bn in 8% preferred securities and warrants for $20bn in cash that can be used to repay the Fed to an advance rate it is comfortable with.
  • Additionally, C is forced to give $7bn in additional preferred to continue to receive a non-recourse advance on these assets.
  • Finally, C is charged a more punitive rate of interest on the financing of these assets at OIS + 300, which is likely 200-250 bps higher than under TSLF or PDCF, with the principal being non-recourse and the interest recourse.

Effectively, the fed went from being long 3-100 risk on $309bn of assets to being long $27bn in C preferred shares and 10-100 risk on the $309bn with a 10% risk share with C and a higher interest rate. I still don't understand how this is a good deal for C or any of the other banks other than it says that the Fed is serious about not letting the whole system fail (which we knew already).