Citi Forks Over $7 Billion to Settle Auction Rate Securities Probe With New York Attorney General

New York Attorney General Andrew Cuomo has announced a settlement worth more than $7 billion with Citigroup.  The settlement requires that Citigroup buy back securities from retail customers, charities and small to mid-sized businesses by Nov 5th.  Hello, third quarter $7 billion writedown!  Actually, the settlement requires that Citi buy back $7 billion in auction rate securities from its retail customers and compensate those who sold them at a loss as well as pay a $100 million fine.  According to Citi, losses should be less than $500 million.

If you disregard Citigroup's remaining CDO portfolio, which it now has to mark down thanks to John Thain's bulk CDO pukage announced last week, things are really looking up at Citi.  If you pay no attention to all of the risk remaining in Citi's home equity, mortgage and credit card portfolios which are certain to deteriorate with the economy, we've definitely found a bottom.  If you chose to ignore all of the remaining litigation risk from the civil suits that will be filed on behalf of institutional investors because of this settlement, despite the fact that they "neither admitted nor denied guilt", can you afford not to buy Citigroup's stock?

It's times like these that call for action.  It's been some time since I have been inspired to concoct an imaginary Vikram Pandit conversation.  For your enjoyment, the following is my interpretation of what may have occurred when Vikram Pandit hammered out a settlement with Andrew Cuomo: 

Andrew Cuomo:  We have some pretty damning evidence that your sales force was instructed to pump auction-rate securities once Citi stopped supporting the market.

Vikram Pandit:  Could you excuse me for a second? I have to take this call.  (Into phone)  Tell them we won't do it for less than 44 cents with 60% financing. (pause) What???  22 cents and 75%?  Ok, tell him he's done on $10 billion.  Ask him where he'll do another $10 billion and call me back! (Hangs up phone)

Andrew Cuomo:  Mr. Pandit.  Put the phone away. You're facing some very serious charges!

Vikram Pandit:  How much do you want?

Andrew Cuomo:  Excuse me?

Vikram Pandit:  How much money do you want and do you need any financing?

Andrew Cuomo:  Are you admitting you're guilty?

Vikram Pandit:  Yes. Absolutely.  Now how much do you want?  Would you like $20 billion?

Andrew Cuomo:  Can you afford a settlement that high?  Won't that threaten your solvency?

Vikram Pandit:  Perhaps.  Yes, you may be right.

Andrew Cuomo:  Perhaps something around $7 billion is more appropriate?

Vikram Pandit:  Perfect!  Will you take CDO's as payment?  The notional amount is around $30 billion.  They're bound to bounce back, after all, they are AAA rated.

Andrew Cuomo:  Absolutely not!

Vikram Pandit:  Ok, not a problem.  I can always get a loan from the Fed against something we own.

Andrew Cuomo:  I'll schedule the press release.

Vikram Pandit:  I won't be able to attend, I have a meeting on an important matter.  (speaking into his phone again)  What?! 18 cents and 80%? (pause) Done!  Ask him where he is for another $10 billion.