How Citigroup Used $45 Billion from the Government

Citigroup released a report today explaining how it “spent” the $45 billion provided to the company by the government as part of the Troubled Asset Relief Program (TARP). On a high level, the report accounts for $46.5 billion spent or allocated to a variety of programs across five categories: residential mortgages, personal and business loans, student loans, credit cards, and corporate loans.

First, $10 billion was used to purchase mortgage bundles from Fannie Mae. The bundles mature this month, which means Citi will receive the $10 billion back and be able to use the funds elsewhere. The report says that this decision was to “help provide liquidity to the secondary market.”

$10 billion is being used to invest directly in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Half of this amount is invested in 15-year fixed rate mortgages while the other half is invested in split between 3-year and 5-year adjustable rate mortgages.

$7.5 billion is being used to buy other mortgages on the secondary market; that is, Citi is buying mortgages offered by other lenders from those other lenders.

$8.2 billion is being used to offer non-conforming mortgages directly to consumers. Non-conforming loans are those with high values, starting at an average of about $500,000, usually necessary in areas with high property values. Interest rates on these loans are higher and so are the risks associated with offering these mortgages.

$1 billion is earmarked for loans to businesses facing short-term financial problems. These loans would be secured by commercial property of illiquid assets.

$1.5 billion is being offered to consumers who would like to consolidate personal debts or who need money to meet other financial obligations.

$1 billion will offered to students as loans through the Federal Family Education Loan Program (FFELP) to help middle income and low income families afford tuition.

$5.8 billion is earmarked for credit cards in order to expand offers for balance transfers, increase credit lines, and acquire new customers. In the statement, Citigroup says, “Credit cards play a critical role in helping people and businesses purchase basic goods and services. Based on available national economic figures, Citi estimates that 20 percent of total personal spending flows through credit card transactions, often for everyday essentials.”

$1.5 billion is being invested in securities backed by commercial loans.

The above amounts are earmarks. Citi did not describe in detail amounts that have already been invested or used vs. amounts that are waiting to be spent at the right time, for example, when there is sufficient liquidity or supply.

Citigroup also offered a description of permitted uses and prohibited uses for money provided by the government. Here is what is permitted:

Citi’s guidelines call for TARP capital to be deployed in a prudent and disciplined manner consistent with Citi’s strategic objectives and the Treasury’s goal of strengthening the financial system in the United States and expanding the flow of credit. TARP capital is equity, in the form of preferred stock. It will be used exclusively to support investments and not for expenses, which are covered as part of our cash flow.

And here is what is not permitted for the TARP funds:

TARP capital may not be used for any of the following purposes: Compensation or bonuses, dividend payments, lobbying or government relations activities, marketing, or advertising or corporate sponsorship activities. TARP capital will not be used for any purposes other than those expressly approved by Citi’s Special Committee.

Accountability and transparency is necessary so consumers can understand how the funds approved by government representatives to bail out financial instituions are being used. I’m happy to read that Citi’s TARP funds are not going to bonuses and executive compensation, but is this the most effective use of the money? I would like to see more funds set aside for direct relief for consumers.

Here is the full 43-page report from Citigroup, called What Citi is Doing to Expand the Flow of Credit, Support Homeowners and Help the U.S. Economy: TARP Progress Report for Fourth Quarter 2008 , February 3, 2009.