Citigroup’s Clever Plan to Screw Taxpayers Again
So Citigroup (C) has proposed that the US taxpayer and other preferred shareholders convert up to $75 billion of preferred stock into common stock, thus bolstering the company’s tangible equity and putting it in less desperate need of a complete takeover.
And what will the US taxpayer get for this preferred stock conversion? 40% of the company for some of its $45 billion of preferred, say reports. The reports add that Citigroup’s goal here is to keep the US’s ownership under 50%, so this won’t be a de facto nationalization.
Well, that’s nice for Citigroup…and another ream-job for taxpayers.
Citigroup’s common equity is currently worth $10 billion. If the US were to convert all $45 billion of its preferred at the current stock price, it should end up with 80% of the company, not 40%.
For the US to convert $45 billion of preferred to common and only get 40% of the company, Citigroup’s existing common equity would have to be valued at $65 billion, not $10 billion, and the conversion price would have to be about $10 a share. Or the US would only be able to convert $4 billion of its $45 billion, which wouldn’t help Citigroup’s tangible equity ratio much.
So is that what Citigroup is trying to do here? Persuade the US goverment to convert to common stock at a price miles above the current trading price, screwing the US taxpayer yet again?
Or does Citigroup have some other secret plan up its sleeve whereby it can take up to $75 billion of debt (preferred stock) off its books and not end up diluting its current shareholders 90%?
GM: Twittering ‘Til The Bitter End
General Motors and Chrysler’s requests for $21.6 billion in federal loans have a lot of citizens up in arms. GM has already asked for (and received) $13.4 billion in loans under the auto industry bailout, and the company claims it would need another $100 billion in government financing if it goes bankrupt.
But the good news is that the auto giant has a comprehensive, full-proof business model to confront the worsening recession:
1. Cut 47,000 American jobs
2. Close five North American plants
3. Drop several brands, including the lightweight, more fuel-efficient Saturn, and to counterbalance that, the “Why Jesus?!” Hummer brand
4. Hope the UAW doesn’t raise too much hell over GM’s inability to pay retirees’ health care costs
5. Twitter
I learned of step five in GM’s Vision of the Future when I twittered the following innocuous (or so I thought) comment:
allisonkilkenny: sees GM is phasing out the small, fuel efficient Saturn. Oil companies: 1, Earth: 0.
Seconds later, I received a reply tweet from something called GMBlogs:
@allisonkilkenny we don’t have indiv trash cans at ofc cubes at hq, just an ex, not sure total $ saved from small ideas, but likely large
In other words, GM is still environmentally-friendly because interns have to share trash cans. Shaky reasoning aside, I was surprised that I had popped onto the radar of GM with my casual mention of their brand, especially when the company should theoretically be preoccupied with, ya know’, going out of business.
I contacted Christopher Barger, GM Director of Global Communications Technology, about this weird prioritizing. Barger quickly responded to my questions, and he explained that GM is using TweetDeck to just search for mentions of GM, as well as interacting with the people who were already following the company. It’s not unusual for a corporation to use Twitter to monitor customer reactions to its products, and Barger equated the practice to customer service, though he seemed to take offense when I pointed out the slim differences between corporate acts of “good will” and propaganda.
I responded that, unlike customer service, I didn’t approach GM with a question or complaint. They specifically searched Twitter for mention of their product and then sent a messenger my way to post some talking points about The Corporation.
An entire department devoted to the cause of Tweeting and blogging may seem like a strange choice for budget allocation considering their economic turmoil, but GM has burst onto the technological scene with great gusto. GM is quick to rationalize, claiming this is totally 100% normal because corporations need to keep their fingers on the pulses of clients and customers, and GM is hardly the only corporation to engage in the magic world of Twitter.
“We knew that when [the loan request] was submitted last night, there would be a lot of people reacting to it — on Twitter, on Facebook, in the blogs. We wanted to be out there answering as many questions as possible about the viability plan itself, the progress we’ve made in its execution since December 2, the impact of the restructuring on our brands and upcoming vehicles, trying to let people know that Saturn still may have life after GM, trying to gauge how people were reacting to the plan,” said Berger.
Of course, gauging customer reaction shouldn’t take a back seat to providing actual products and services, say cars and health care. If GM is looking for a reaction from American citizens about their billions of dollars in requested loans and mistreatment of their employees, I can save them a lot of time and Tweeting:
It’s not good. It’s very bad. Less people want to buy your heavy, fuel-inefficient cars, and almost no one is thrilled that taxpayers are paying you billions of dollars to close domestic plants and ship jobs across our borders. Few people like that you mistreat unions. No one likes that in your rush to modernize and embrace the technology of the internet (complete with Twitter experts,) you forgot how to compete with foreign car companies.
It is possible to make tweets private and avoid the watchful eye of corporations, though that protection has already been hacked. For now, know that while you may never again own a good American car, you’re sure to get a prompt reply whenever you Twitter about GM.
Merrill Shocker: CEO Thain’s $87,000 Office Rug

(Andrew Harrer, Bloomberg News / Landov)
In a Daily Beast/CNBC exclusive, Charlie Gasparino reveals how Merrill Lynch’s CEO spent over $1 million and hired the Obamas’ decorator to redecorate his office last year—even as the firm faced a financial crisis.
UPDATE: Bank of America has just announced that Thain will leave the firm, less than a month after its merger with Merrill.
In early 2008, just as Merrill Lynch CEO John Thain was preparing to slash expenses, cut thousands of jobs and exit businesses to fix the ailing securities firm, he was also spending company money on himself, senior people at the firm say.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a “Roman Shade” for $11,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain’s conference room and another area rug for $44,000; a “mahogany pedestal table” for $25,000; a “19th Century Credenza” in Thain’s office for $68,000; a sofa for $15,000; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a “George IV Desk” for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a “Roman Shade” for $11,000; a “custom coffee table” for $16,000; something called a “commode on legs” for $35,000; a “Regency Chairs” for $24,000; “40 yards of fabric for wall panels,” for $5,000 and a “parchment waste can” for $1,400.
The documents also show that Thain signed off on the purchases personally. “Labor to relamp the six wall sconces” cost $3,000, and Thain authorized the payment of another $30,000 to pay the expenses Smith incurred in doing the work. Thain has hired Smith—whose celebrity client list includes Steven Spielberg, Michelle Pfeiffer, Cindy Crawford and Sir Evelyn de Rothschild—to design and decorate his private residences. They include a Manhattan apartment at 740 Park Avenue, and his 10-acre mansion in Rye, NY.
Thain was tapped to run Merrill Lynch as the firm suffered massive losses from investments tied to the depressed real estate market under his predecessor Stan O’Neal, who was ousted in late 2007. Those losses continued through 2008, forcing Thain and his management team to sell the brokerage firm to Bank of America in mid-September or face near certain liquidation as investors fearing further losses began pulling lines of credit and other financing.
Just last week, Bank of America announced that Merrill has suffered an unexpected loss of $15 million for the fourth quarter of 2008, nearly collapsing BofA’s purchase. Bank of America CEO Ken Lewis said that without $138 billion in government assistance, including the infusion of $20 billion from the federal government he would have pulled out of the Merrill deal, which was approved by BofA shareholders in early December.
Thain has come under pressure in recent weeks after several top executives at Merrill, including brokerage chief Bob McCann and investment banking head Greg Fleming, abruptly resigned from the firm citing differences with Thain. People close to Lewis say his relationship with Thain was further strained by the recent massive loss. Lewis himself has faced withering criticism for rushing the buy Merrill for $28 billion after less than two days of due diligence.
“I don’t want to convey to you that Ken was delighted in mid-December when he found out about the losses, in fact he was pissed at Thain,” one person at BofA who is close to Lewis told The Daily Beast earlier in the week. “He’s not doing anything about Thain now because it isn’t clear whether Thain should have told him sooner. So at least for now, Ken is sticking with Thain.” (A spokeswoman for Thain denied a rumor inside Merrill that Thain is poised to step down from the firm.)
It’s unclear how the disclosure of the personal expenses will effect now Thain’s position. Thain signed off on the purchases in January, people close to Merrill say, when Merrill was still an independent firm and when some analysts believed the company was poised for a rebound with Thain as the new CEO. Thain came to Merrill after a largely successful stint as CEO of the New York Stock Exchange, where he converted the not-profit entity to a public company. Before that, he was a long-time executive at Goldman Sachs, where he served as former CEO Hank Paulson’s No. 2.
Still others say spending so much company money on personal items shows incredibly bad judgment on the part of Thain since Merrill was in the middle of a financial crisis that ultimately led to its demise as an independent company. At the time, Thain was preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel. In addition to the personal expenses on his office, documents show Thain paid his driver $230,000 for one year’s work, which included the driver’s $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay. Drivers of top executives are often paid about half that amount.
“If this is accurate it has shades of Dennis Kozlowski’s $6,000 shower curtain,” said investor Doug Kass of Seabreeze Capital Management, in a reference to former Tyco CEO Dennis Kozlowski who was convicted of fraud and is serving prison time for improperly spending millions of dollars on personal items. While there is no evidence that what Thain did is either illegal or of the magnitude of the spending by Kozlowski, Kass said “Merrill was on the fence and Thain came into save the company. It’s still a lot of money and there is no rationalization for something like this.”
Charles Gasparino appears as a daily member of CNBC’s ensemble. Gasparino, in his role as on-air Editor, provides reports based on his reporting throughout the day and has broken some of the biggest stories affecting the financial markets in recent months. He is also a columnist for Trader Monthly Magazine, and a freelance writer for the New York Post, Forbes and other publications.
Bush OKs $17.4B Bailout of the Auto Industry
WASHINGTON – Citing danger to the national economy, President Bush approved an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans in exchange for tough concessions from the deeply troubled carmakers and their workers.
Allowing the massive auto industry to collapse in the middle of what is already a severe recession “would worsen a weak job market and exacerbate the financial crisis,” Bush said. “It could send our suffering economy into a deeper and longer recession. And it would leave the next president to confront the demise of a major American industry in his first days of office.”
President-elect Barack Obama, who takes office a month from Saturday, praised the White House action but also warned, “The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely necessary to save this critical industry and the millions of American jobs that depend on it, while also creating the fuel efficient cars of tomorrow.”
Stock prices rallied on Wall Street as investors cheered the government’s action. Republicans on Capitol Hill, though, expressed disdain for the bailout. And while the United Auto Workers said the plan would keep factories running, the union said it was upset by loan conditions “singling out workers.”
“We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” said Ron Gettelfinger, president of the UAW.
Obama will be free to reopen the arrangement from the government’s side if he chooses, an administration official said.
Bush said, “The time to make hard decisions to become viable is now, or the only option will be bankruptcy. The automakers and unions must understand what is at stake and make hard decisions necessary to reform.”
Some $13.4 billion of the money would be available this month and next — $9.4 billion of it for General Motors and $4 billion for Chrysler LLC. GM is slated to receive the remaining $4 billion in loans after more money is released from the financial rescue account.
Under terms of the loans, the government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry. Bush said the companies’ workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.
And he called for elimination of a “jobs bank” program — negotiated by the United Auto Workers and the companies — under which laid-off workers can receive about 95 percent of their pay and benefits for years. Early this month, the UAW agreed to suspend the program.
Treasury Secretary Henry Paulson said Congress should release the second $350 billion from the financial rescue fund that it approved in October to bail out huge financial institutions. Tapping the fund for the auto industry basically exhausts the first half of the $700 billion total, he said.
If the carmakers fail to prove viability by March 31, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans.
General Motors Corp. CEO Rick Wagoner said in Detroit that GM had much work ahead but he was confident it could reinvent itself with the government help and even lead an economic recovery in America.
House Republican leader John Boehner called the administration’s plan “regrettable.” He said that granting loans for automakers was never the intention when Congress passed the $700 billion plan to rescue financial institutions and that the new plan “has failed both autoworkers and taxpayers.”
Rep. Jeb Hensarling, R-Texas, chairman of the congressional oversight panel for the Wall Street rescueprogram, decried the decision, saying a Chapter 11 reorganization, not loans rewarding decades of mismanagement, would have been a better decision.
“Unless union contracts are renegotiated, and unless demand picks up for domestic autos, $14 billion, $34 billion, $74 billion — even $104 billion — will not solve the problem,” Hensarling said. “I fear that a devastating precedent has been set that the federal government will now be pressured to bail out every failing company in America — something that taxpayers and future generations cannot afford.”
Under terms of the loan, GM and Chrysler must provide the government with stock warrants giving it the option to buy GM and Chrysler stock at a specific price. In addition, the automakers would be required to agree to limits on executive pay and eliminate some perks such as corporate jets.
Paulson, who plans to discuss the deal with congressional leaders and Obama’s transition team in the near future, said he was confident that the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. have the resources to address a significant market crisis if one should occur before Congress approves the use of the second half of the rescue fund.
Friday’s rescue plan retains the idea of a “car czar” to make sure the auto companies are keeping their promises and moving toward long-term viability.
The short-term overseer will be Paulson. But the White House deputy chief of staff, Joel Kaplan, said that if the Obama team wants someone else installed to bridge the administrations, Bush is open to that. Kaplan said there have been discussions with Obama’s aides throughout the process and the White House believes Obama’s view of the problem and the solution tracks with theirs.
The White House package is the lifeline desperately sought by U.S. automakers, who warned they were running out of money as the economy fell deeper into recession, car loans became scarce and consumers stopped shopping for cars.
The carmakers have announced extended holiday shutdowns. Chrysler is closing all 30 of its North American manufacturing plants for four weeks because of slumping sales; Ford will shut 10 North American assembly plants for an extra week in January, and General Motors will temporarily close 20 factories — many for the entire month of January — to cut vehicle production.
Chrysler CEO Bob Nardelli thanked the administration for its help.
In a statement Friday morning, Nardelli said the initial injection of capital will help the company get through its cash crisis and help eventually return to profitability. He said Chrysler was committed to meeting the conditions set by Bush in exchange for the money.
Ford President and CEO Alan Mulally said his company would not seek the short-term financial assistance but predicted the aid would stabilize the industry.
“The U.S. auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy,” Mulally said.
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