U.S. government unveils bold plan to rescue Citigroup

Monday 24th November, 11:57 AM JST

WASHINGTON —

The government unveiled a bold plan Sunday to rescue Citigroup, injecting a fresh $20 billion into the troubled firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp, is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement issued late Sunday night. “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.”

The move 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 — which was recently rejiggered — to insurer American International Group.

Critics worry the actions could put billions of taxpayers’ dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated.

Investors reacted cautiously to the plan. Most Asian stock markets retreated when they opened Monday, weighed down by worries about Citigroup. However, losses were pared after the government announcement.

Vikram S. Pandit, Citi’s chief executive officer, welcomed the action. “We appreciate the tremendous effort by the government to assure market stability,” he said in a statement.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

As part of the plan, 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.

Under the loss-sharing arrangement, Citigroup Inc will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90% of the remaining losses, and Citigroup 10%. 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.

In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup.

As a condition of the rescue, 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.

Importantly, 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.

Under the IndyMac plan, struggling home borrowers pay interest rates of about three percent for five years. Rates are reduced so that borrowers aren’t paying more than 38% of their pretax income on housing.

The IndyMac plan also was used as a model for a new program by mortgage finance companies Fannie Mae and Freddie Mac and for two other failed thrifts taken over by the government on Friday. FDIC Chairman Sheila Bair has been pressing Treasury to use $24 billion from the $700 billion bailout program to put the mortgage modification program on national footing, but Paulson is opposed to that idea.

The once mighty Citigroup, which had at one time been the largest U.S. bank by assets, has seen its shares lose 60% of their value in the past week, 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 — losses that could be nearly impossible to reverse.

Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company has operations stretching around the globe in more than 100 countries.

Analysts consider Citigroup the most vulnerable among the major U.S. banks — especially after it failed to nab Wachovia Corp, which was bought instead by Wells Fargo & Co. That was a missed opportunity for Citi to gets its hands on much-needed U.S. deposits that would bolster its cash position.

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 huge losses 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.

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AP Business Writers Marcy Gordon in Washington and Madlen Read in New York contributed to this report.

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12 Comments

Athletes at 06:28 PM JST - 24th November

I have no idea the government can afford to bail out all of the failed banks. Bush promoted the free market & free capitalist principles. In the reality, he did the opposite way. It is a socialist way for bailing out the private companies. Fredie & Fannie has been already nationalized. It is understandable. Protecting foreign souvereign funds for their massive investments. Otherwise, no one will buy the government bonds in the future.

Bank needs the liquidity for restructuring. However injecting the massive capital alone will not enough for preventing the insolvency. If the share price of bank is keep falling in the market, capital flights will occur. Unstability will make the banks to frozen some accounts. Investors & depositors will become panic again. No circulation of credits. Economy will not grow any further.

Weaks needed to fall & only one or two strongest banks needed to give the life support. It is a sad reality.
GJDailleult at 06:39 PM JST - 24th November

Plan announced late on a Sunday night, just like with Bear Stearns. In other words, they were likely afraid of what might happen if they opened the market today without an announced plan. Should be an interesting day.
some14some at 08:01 PM JST - 24th November

First Citigroup then Cities, go ahead but make sure $700bn budget will be sufficient.
zurcronium at 08:09 PM JST - 24th November

We are all witnesses to the collapse of free-market capitalism as promoted for decades by so many in the US and elsewhere. Interesting quote below on what is transpiring . . .

What is most revealing about the financial meltdown and economic crisis, however, is that it illustrates that corporations - if left to their own worst instincts - will destroy themselves and the system that nurtures them. It is rare that this lesson is so graphically illustrated. It is one the world must quickly learn, if we are to avoid the most serious existential threat we have yet faced: climate change.

So what is left, the government. Long despised by the backward republicans and other believers in the fairy tale that is the free market. Obama will run everything now as banks, insurance, autos, you name it, all these industries have failed or are failing due to their own stupidity and greed and are begging to be bailed out. Businesses, just like the republicans who generally run them, need to be protected from themselves by those that are smarted than they are and have a longer term view. Its like protecting smokers from themselves and others, they just cannot do it themselves as they are addicted to the drugs.
buttamimi at 08:37 PM JST - 24th November

Is any bank safe?
some14some at 10:40 PM JST - 24th November

Bush promoted the free market & free capitalist principles. In the reality,

In the reality, Bush and rest of the world is now watching Niagara Falls while not exceptionally high, the Niagara Falls are very wide.
SedanDelivery at 10:56 PM JST - 24th November

The 8:09 entry here from 'zurcronium' is plagiarized.

The original appears on Alternet.org

The 10 Worst Corporations of 2008 By Robert Weissman, Multinational Monitor. Posted November 24, 2008.
Nessie at 11:44 PM JST - 24th November

The 8:09 entry here from 'zurcronium' is plagiarized.

No, it's not plagiarized. It's posted as a quote from somewhere else but without the source. Laziness, not plagiarism.
goodDonkey at 11:55 PM JST - 24th November

Athletes at 06:28 PM JST - 24th November

Excellent analysis. We must get a higher level of liquidity back for our economy to function.

In my opinion Bush has done well in his efforts to bailout important institutions. I think a "plan to rescue Citigroup" is also a good idea. A lot of money will get wasted; there is no doubt about that. We are already looking at something in the ballpark of $8.5 trillion as a complete loss in the value of assets across the nation. That does not include the big hit we still have to look forward to with the "toxic assets" providing further losses. The inaction in this critical time frame that careful planning would bring to save a few billion here and there would result in a further loss of trillions of dollars in asset values. I do not want to pass on huge debts to our grandchildren but a depression or very deep ressesion will end up eating up more money in the long run and will take considerably longer to crawl out of. I do not like government ownership of what should be private institutions but I understand Bush's efforts are for the overall good of the nation. If we can lessen the impact of this recession we will be able to return all the assets to the private sector where they belong. I am not afraid to say that I think we should have rescued Lehman Brothers. I know many disagree with me and I respect their opinion. It may well turn out that I was wrong and that letting Lehman Brothers fail served a useful purpose.
Athletes at 10:41 AM JST - 25th November

goodDoney

Thanks for your comment. City bank has political backing for bail out. Lehman is not lucky like city. It is not because city is better & stonger bank. Actually it is a weak & poorly managed like Lehman Brothers. They also hold the high volume of toxic loan assets like lehman bros. I prefer the way strong bank take over the weak bank or merging the banks each other. It will make more transparency, less complexity & accountabilty. Less is beter than more.

City bank has risk assement team. However they were incompentent & ignored the risk for a long time. Not long ago the problems of sub prime mortgage got the attention of CEO. Whey they analysised the loans, they were rated as Tripple A rating by credit rating agency. They assumed that those loans were safe & sound because of the rating. They even created the "Colletral Obligation for debts" for credit swap. They made some profits & expanding the risks for further return.

When the bear stearns collapsed, they hold the crisis meeting. However they ignored the problems & the real huge loss from market occured in October. Risk assessment manager was fired. Their crediblity has lossed. Unlikely investors will get back the half amount of default loans.

Bush followed the economic theory of the Ronald Regan. According the Reganomic, market has own magic. government is the problem for free market.Deregulation & non government intervention is essential. Let the market wild & prosperity will fall from the sky. What we are witnessing now is sad reality. Regan's theory was just a fairy tale for us. Once mighty US banks are crippling. Fundamental structure of financial system is flawed & unwise.

Wall street has losed the credibility. Once credibility has losed it is hard to get back. Goverment need the huge finance for bailing out. Foreigners will not supply the finance forever because they are facing their downturn too. Sound & well managed banks needed help. However not every bank needed to be rescued.
nandakandamanda at 03:46 PM JST - 25th November

SedanDelivery

The 8:09 entry here from 'zurcronium' is plagiarized.

No, but it is lazy, (Nessie, yes) and also irritating, as there are no quotation marks, so we cannot distinguish where if anywhere the original quotation ends, and whether any of the last is his own opinion.
wanderlust at 11:30 AM JST - 27th November

Whey they analysised the loans, they were rated as Tripple A rating by credit rating agency. They assumed that those loans were safe & sound because of the rating.

The Credit Rating agencies such as Moodys, S&P and Fitch have been rather quiet of late. Their ratings have been exposed as a crock. How much responsibility do they have for all of this mess? How much collusion was their between these so-called independent rating agencies and the banks?