U.S. government agreed to rescue Citigroup by shouldering as much as $306 billions in possible losses of troubled assets of the stricken bank and to inject a fresh $20 billion into the company. The agreement also gives the government control of executive bonuses and places limits on dividend payments. This move was announced late Sunday by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
The Rescue Plan
The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion is on the top of an earlier one of $25 billion provided to the Citigroup in which the government also received an ownership stake.
Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages. Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. Money from the $700 billion bailout and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.
The government will get $7 billion in preferred shares of Citigroup with an 8 percent dividend in exchange for the guarantees.
Citi will also issue warrants to the U.S. Treasury and the FDIC for about 254 million shares of the company's common stock at a strike price of $10.61.
As a condition of the rescue, the government must approve all executive compensation, including bonuses. In addition, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.
The agreement calls on Citigroup to take steps to help distressed homeowners. Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.
The rescue plan represents the first time the government has absorbed bad assets rather than injecting money directly into financials. Switzerland's government recently crafted a similar agreement with UBS AG.
Too Big to Fail
Citigroup is too big to fail because it is such a large, interconnected player in the financial system. The company, with some 200 million customers, has operations stretching around the globe in more than 100 countries.
The government action is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already fragile financial system and the U.S. Economy. Citigroup failure would have seized up still fragile lending markets and caused untold losses among institutions holding debt and financial products backed by the company.
The action is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase's buyout of ailing Bear Stearns. Six months later, the government was forced to take over mortgage giants Fannie Mae and Freddie Mac and throw a financial lifeline to insurer American International Group.
Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up $20 billion losses over the last year on the soured investments. The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.
A year ago, the stock market valued the company at about $180 billion. As of Friday morning, its market capitalization stood at $20 billion and its share price had shriveled to $3.75, a 16-year low.
Citigroup shares has plunged 60 percent of their value in the past week to a 16-year low, reflecting a crisis of confidence among skittish investors. They are worried all the risky debt on Citigroup's balance sheet will turn into losses as the economy worsens and the markets stay turbulent.
Market After Closing Bell
U.S. stocks Monday rallied for a second consecutive day after the government agreed to rescue Citigroup Inc. and as President-elect Barack Obama directed his new economic team to get to work.
Citi shares closed up 58%, at $5.94. Financial stocks in the S&P 500 posted their biggest one-day percentage gain ever on Monday, closing up about 17%. The Dow Jones Industrial Average, of which Citi shares are a component, rose 5%, extending Friday's late rally.
Useful finance and economic links: Dollar community on mixx, Money and Economy group on Ma.gnolia, smartinmoney.blog
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