Citigroup, the Bailout and a Brief Primer on the Elevator

Josh Clark

Here at HSW headquarters, we have the Captivate Network, a newsfeed broadcast on little televisions embedded in the elevators, since it's beyond imagination for humans not to be distracted at every possible moment of our lives. I actually made a New Year's resolution not to pay attention to the TVs, but that went the way of disco and this morning I read of a change in the government's stake in Citigroup.

CNN Money reports that the Treasury converted its 8 percent holding in the form of Citigroup preferred stock into a 40 percent stake in the form of common stock. At the same time, the bank announced a $9.6 billion goodwill impairment charge.

"What the heck's a goodwill impairment charge?" I asked another man in the elevator, figuring he was just some schlub like me. I'm a pretty friendly guy, on the order of Golden Retrievers, just making conversation. Turns out he's a former banker and he launched into an earnest and through explanation. He put it like this:

Goodwill is an intangible value of a business, usually concerned with the brand name of a company. Brand recognition can have a calculable market value (often using some fuzzy accounting, it turns out). When that value is diminshed, a company's goodwill is impaired. When this occurs, that company can take a goodwill impairment charge; essentially a tax write off on a loss.

In the specific case of Citigroup, the government's intervention in the form of $45 billion in taxpayer money impaired the bank's goodwill. The government took preferred stock in the bank, which put the Treausury at the front of the line for payouts as far as shareholders go and leaving a whole lot of common stock (which pays out last) available and unwanted.

By hoarding preferred stock in Citigroup over the past several weeks, the bank calculates that the federal government drove off enough potential investors that it cost the company $9.6 billion in lost value. So the government took its place at the back of the line by switching out to common stock.

So that's $45 billion, plus the lost taxable revenue on the $9.6 billion that American taxpayers will be on the hook for, just for Citigroup. Anyone think maybe we could use some new rules for the bailout?

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