The US government unveiled a bold plan on Sunday to rescue troubled Citigroup, including taking a US$20 billion stake in the 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 (FDIC), is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the US economy.
The sweeping plan is geared toward 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 US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,” the three agencies said in a statement issued late on 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 yesterday, weighed down by worries about Citigroup. However, losses were pared after the government announcement.
The US$20 billion cash injection by the Treasury Department will come from the US$700 billion financial bailout package. The capital infusion follows an earlier one — of US$25 billion — in Citigroup in which the government 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 US$306 billion of risky loans and securities backed by commercial and residential mortgages.
Under the loss-sharing arrangement, Citigroup Inc will assume the first US$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 US$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 US$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 US$0.01 a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of US$0.16, halved from a US$0.32 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, California.
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