The federal government on Sunday night said it would throw its weight toward stabilization of troubled financial-services giant Citigroup Inc. (C) by moving to guarantee $306 billion in troubled assets on the bank's books, according to a joint statement issued by the Federal Reserve, Treasury Department and Federal Deposit Insurance Corp.
The deal involves Treasury injecting an additional $20 billion in capital into Citigroup. Treasury will charge an 8% interest rate for the first few years, which is higher than the rate charged to other banks participating in the Troubled Asset Relief Program. Citi had already received $25 billion in aid from TARP.
The Bush Administration said rescuing the battered bank was imperative to stabilizing the financial system, and ultimately putting the economy back on track.
"This is a tough situation for America, but we'll recover from it," President Bush said at a press conference. "The first step for recovery is to safeguard our financial system."
Citigroup CFOGary Crittenden defended the rescue, and Citi's position citing intense downward pressure on the bank's stock due to capital worries and general financial turmoil.
There is a concern that "the company ... raise substantial amounts of common equity, and when that concern exists there is always downward pressure on the stock price, and as the stock price itself goes down that just exacerbates itself," he told the FOXBusiness Network. "We have made it very clear that the amount of capital in the company now will allow the company to ... operate normally even in a very disruptive environment."
Citi will issue $7 billion in preferred stock with an 8% dividend that will be split between the Treasury and the FDIC. If those dividends aren’t paid in full for six dividend periods – whether consecutive or not – the Preferred shareholders will have the right to elect two directors. That right ends when a certain amount of the dividends are paid up.
In addition to the equity stake, the Treasury will receive $2.7 billion in warrants that can be exercised in total or in part any time in the next decade. If exercised, these warrants enable the Treasury to purchase Citigroup stock at $10.61 per share.
Among other measures, the new agreement limits common-stock dividends of more than one cent a share for the next three years without the permission of the Treasury, FDIC and Fed.
“A factor taken into account for consideration of the [government’s] consent is the ability to complete a common stock offering of appropriate size,” the release said.
The government also agreed to backstop a $306 billion pool of Citi's assets, which is meant to provide Citigroup with "protection against the possibility of unusually large losses." Residential assets will be guaranteed for 10 years, and non-residential assets will be guaranteed for 5 years. Assets will remain on Citi's books, the Fed said, but will be appropriately "ring-fenced."
In that plan, Citigroup must absorb the first $29 billion in losses from these assets, in addition to existing reserves.
Any losses in the portfolio in excess of that amount will be absorbed 90% by the government and 10% by Citigroup. The Treasury via TARP will absorb the first $5 billion of the government's losses, then the FDIC takes the next $10 billion. Any further losses will be absorbed by the Fed.
Citigroup would also agree to try to modify troubled mortgages held in the $306 billion pool. It is prohibited from paying common-stock dividends of more than one cent per share per quarter.
The Wall Street Journal reported that the government is not expected to seek management changes at Citi, which it saw as potentially too destabilizing. However, Citi will have to submit to the government for approval an executive compensation plan “including bonuses, that rewards long-term performance and profitability, with appropriate limitations,” according to the release.
Citi is reported to have approximately $1.2 trillion in risky, off-balance-sheet assets. Those assets include some $667 billion in mortgage backed securities and $406 billion in so-called variable interest entities. Citigroup CEO Vikram Pandit said in a town hall meeting that Citi does not "bear the credit risk" for those assets and that it is "highly unlikely that the vast majority of these mortgages will come back on our balance sheet."
Still, industry participants say that although it is unlikely for those assets to bear a risk, even if a small percentage do get back on the balance sheet, it could potentially cause billions in further writedowns.
Fears of such writedowns have pushed Citi's stock lower by more than 50% for the month. In trading Monday, Citi shares recently surged 61% to about $6.08.
It is also possible, experts say, for the bank to sell some of its assets to other companies to raise more capital. Indeed, HSBCChairman Stephen Green said Monday the bank would consider buying the "right" Citigroup assets, according to media reports.
Separately, Citigroup said Sunday night it will expand its Philippines operation by hiring an additional 1,000 workers, the Manila Standard Today newspaper reported Monday. The additional workers would expand Citigroup's call center and financial reporting operations, the paper said citing Citi's country manager Mark Jones.
This move comes on the heels of Citi's announcement last week that it would slash 52,000 jobs in a bid to cut costs.
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