Nov 24

U.S. agrees to bail out Citigroup

SAN FRANCISCO (MarketWatch) — The U.S. government agreed Sunday night to rescue Citigroup Inc. with a huge bailout plan that includes a $20 billion capital infusion, guarantees for up to $306 billion of Citi’s troubled assets - and control of executive bonuses.

The agreement with beleaguered Citi

C 3.77, -0.94, -20.0%) , whose stock had dropped more than 60% in the past week to a 16-year low, and which had lost $160 billion of its $180 billion market capitalization in the past year, came after intense weekend negotiations with the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., according to media reports.

These are the key provisions of the bailout: See Treasury Department statement

The Treasury will inject an additional $20 billion in capital and will charge a higher interest rate, 8% for the first few years, than is charged to dozens of other banks borrowing money under the government’s $700 billion rescue package approved by Congress in October, according to The Wall Street Journal.
The government agrees to backstop a roughly $306 billion pool of Citi’s troubled asset, including mortgage-backed securities. Citigroup must absorb the first $29 billion in losses and 10% of anything beyond that. Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed. The guarantees will be for 10 years for residential assets, five years for nonresidential assets.
Citi will offer the government preferred shares in return for the capital infusion.
Citigroup would also agree to work to modify, if possible, troubled mortgages held in the $300 billion pool, using standards created by the FDIC after the collapse of IndyMac Bank.
The government must approve all executive compensation, including bonuses..

Citigroup previously agreed to issue the government preferred shares in return for the $25 billion the bank received as one of the first nine companies to get capital infusions.

Citi is one of the world’s best-known financial institutions, with more than 200 million customers in 106 countries.

The agreement marks a new phase in government efforts to stabilize U.S. banks and securities firms, the Journal reported.

After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to absorb bad assets, on a targeted basis, from specific institutions, according to the Journal’s report.

In addition to $2 trillion in assets it has on its balance sheet, Citi has another $1.23 trillion in entities that aren’t reflected there, according to reports. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company’s books, the Journal said.