Uncle Sam is stepping in to stop the bleeding at Citigroup Inc., as the bank will now have the Treasury Department, FDIC and Federal Reserve backstopping losses on more than $300 billion of the toxic assets embedded on its books.
The federal government is stepping in to prop up Citigroup with a $20 billion capital injection -- on top of the $25 billion in TARP funds its already received -- and will provide guarantees on up to $306 billion of the bank's troubled assets. In return, the government will exercise veto power control over executive's compensation and bonuses, and Citi will stop paying dividends to common stockholders for at least three years.
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According to the bailout's term
sheet, details of the deal include:
- A $20 billion capital injection. The government will receive preferred shares
that pay an interest rate of 8%, which is higher than other banks receiving
TARP money pay on the preferred shares issued to the government. As a result of the asset guarantee, the $306 billion portfolio will
have a new risk weighting of 20%, thus freeing up an additional $16
billion of capital to Citi.
- The Federal government will act as a back stop on losses from a $306 billion
pool of the bank's poorly performing assets, including Citi's mortgage-backed
securities. Citi will be required to shoulder the first $29 billion in losses,
as well as 10% of anything beyond that. After that the Treasury Department
will take on the next $5 billion in losses, followed by the FDIC absorbing
the next $10 billion in losses. Beyond that, the Federal Reserve will take
the hit. The guarantees will be for 10 years on residential assets and five
years for nonresidential assets.
- The bank is required to modify, if possible, troubled mortgages within the
$306 billion pool, using the guidelines created by the FDIC after the collapse
of IndyMac Bank.
- The Treasury will receive $2.7 billion in warrants from Citigroup.
- The government receives approval power over all executive compensation and
bonuses.
Citigroup and officials from the Fed, Treasury and FDIC spent the entire weekend
hammering out the terms of the deal in order to restore some confidence in the
bank as its stock lost 60% of its value last week. It was generally agreed that Citigroup was simply to large and interconnected to be allowed to fail,
and some sort of intervention was expected to avoid the financial carnage that
its failure would cause.
The bank's top management had maintained that Citigroup was well capitalized
and in no danger of failing, but investors, leery that multibillion-dollar
write-downs still lurk for Citi, have been selling the stock with a vengeance.
Citigroup is one of the largest holders of mortgage-backed securities such
as collateralized debt obligations, which have been at the heart of the banks
losses. The bank has posted losses in the billions in each of the last four
quarters as it wrote down the value of the assets and was forced to bring more
and more previously off-balance sheet assets back onto its books.
Citigroup still has roughly $20 billion of mortgage-linked securities on its
books, according to The New York Times, the bulk of which have been written
down to between 21 cents and 41 cents on the dollar. Additionally the bank holds
billions in leveraged loans from private equity and corporate deals as well
as billions more in automotive and credit card loans that could tank as the
economy goes into a recession. - George White
See Citigroup press release
See the bailout's term sheet
Comments
my initial thought upon hearing about Citibank's potential bankrupcy was, if Citi goes under, will that cancel out the (negative) small fortune I have stored up on my trusty Citi-card?