Monday, November 24, 2008

EconomicWatch: Citi Dodges A Bullet

The troubled bank secures an additional capital injection from the U.S. government and guarantees on troubled assets.

NEW YORK - The U.S. federal government on Sunday announced a massive rescue package for Citigroup - the latest move to steady the banking giant, whose shares have plunged in the past week.

The plan has two key features:

First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

The government will impose other restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share and will face limits on executive compensation. Plus, it will be expected to adjust mortgages for troubled borrowers, according to procedures outlined by the FDIC.

"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," said a joint statement by Treasury, Federal Reserve and the FDIC.

Under the terms of the Citigroup rescue package, the bank would be on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. It would cover 10% of losses above that amount, with the government shouldering the rest.

A Scary Week

The plan comes after the company's stock plummeted over fears about its exposure to toxic mortgage assets.

Citigroup ( C, Foretune 500) shares lost close to two-thirds of their value last week amid concerns about the underlying health of the bank - over the past year, the company has recorded close to $21 billion in losses. As of Friday's close, Citigroup shares had dipped below $4 a share, down 87% this year.

The most recent slide comes on the heels of news earlier this month that the Treasury Department was abandoning its initial rescue plan to buy troubled assets from banks - Citigroup had been seen as a major beneficiary of that strategy.

Instead, as part of the $700 billion bailout package that was signed into law in early October, Treasury has focused on making direct investments in banks. In exchange for equity stakes, the agency has injected $25 billion into Citigroup and an additional $100 billion into eight other major U.S. financial institutions.

That rescue package has yet to fully calm markets.


Money, FOX News, WSJ

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