The U.S. government is promising to protect struggling banking giant Citigroup against large losses by issuing a $306 billion guarantee for its capital and purchasing a $20 billion stake in the company using a financial rescue package approved by Congress.
The announcement came shortly before midnight on Nov. 23, after the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation reached an agreement with Citigroup to provide a package of guarantees to the bank saddled with staggering losses.
In a joint statement issued after the talks, the three agencies said they will provide Citigroup "protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet."
In addition, the Treasury Department will invest $20 billion in Citigroup from the Troubled Asset Relief Program, a $700 billion package approved by Congress earlier this year to soften the effects of the banking crisis, in exchange for preferred stock with an eight-percent dividend to the Treasury, officials said.
Citigroup, on its part, has agreed to comply with unspecified "enhanced executive compensation restrictions" and implement the FDIC's mortgage modification program.
"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy," the three agencies said. "We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks." But the agencies promised to, as they put it, to "carefully circumscribe the involvement of government in the financial sector."
Citigroup, for its part, said will issue $7 billion dollars worth in preferred stock to the U.S. Treasury and the FDIC as payment for the $306 billion guarantee. Citi will also give the government warrants for approximately 254 million shares of the company's common stock at a strike price of $10.61 a share. The bank also has agreed to suspend paying a quarterly common stock dividend for three years.
The guarantee calls for Citi to assume any losses on the portfolio up to $29 billion and for the government to assume 90% of any losses above that level.
Vikram Pandit, Citi's chief executive officer, said the bank appreciated "the tremendous effort" by the government to assure market stability. "We are committed to streamlining our business and providing outstanding banking services to our clients around the world."
The deal had been expected on Wall Street on Nov. 21 when Citigroup shares were in free fall, with investors skeptical about the bank's ability to recover without outside help. Shares of Citigroup, a component of the blue-chip Dow Jones Industrial Average, have tumbled more than 70% since the start of the year, with the bank hit by hefty writeoffs linked to the real estate crisis. Stock prices for the New York City-based company closed at $3.77 on Nov. 21, their lowest level in years.
On Nov. 17, the bank announced it was slashing a near-record 50,000 jobs worldwide to cope with the global financial crisis and heavy losses. At its peak last year, the company employed 375,000 people. Last month, Citi reported a third-quarter loss of $2.8 billion, its fourth straight quarter in the red.
The troubled bank is saddled with billions of dollars in losses tied to mortgage investments that lost value in the collapse of the real estate market and the credit squeeze that erupted last year.But Citi operates in over 100 countries and, with more than two trillion dollars in assets, is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
The ailing bank was among the nine big banks that agreed last month to give the U.S. government equity stakes in exchange for a combined $125 billion under a $700 billion financial sector rescue plan. Citi got a $25 billion injection. Since last year Citi has raised more than $50 billion to shore up its balance sheet, reduced its investment portfolio by more than $100 billion, reorganized activities and sold several businesses, such as CitiStreet, CitiCapital, BPO in India and a retail bank in Germany.
Copyright Agence France-Presse, 2008