U.S. Offers Citigroup Expansive Safety Net
Monday, November 24, 2008
The government said last night that it will provide a multibillion-dollar backstop for Citigroup, revamping emergency efforts yet again to head off the failure of a company more deeply intertwined with the financial system than nearly any other.
The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. announced just before midnight Monday that they will protect Citigroup, one of the nation's largest banks, against potential losses on a $306 billion pool of troubled assets.
Citigroup would absorb the first $29 billion in any further losses on these assets, which are primarily securities backed by mortgages and commercial real estate loans, with the government stepping in to cover most of the losses beyond that amount. The distressed assets would be fenced off by Citigroup from the rest of its holdings, allowing the firm to insulate itself from the fallout.
The government in return is to receive up to $7 billion in preferred shares.
The Treasury also will invest another $20 billion in Citigroup on top of the $25 billion of taxpayer dollars already invested in the bank this fall. In exchange, the government will get even more preferred shares, paying an 8 percent return.
As a condition of the emergency assistance, the company will have to adhere to new restrictions on what it pays its executives and carry out an FDIC program to help homeowners avoid foreclosure, according to a statement by the three government agencies involved. The terms of the new cash injection are also less favorable for the company's shareholders than those of the initial infusion by limiting stock dividends to a penny per share in each quarter over the next three years.
In taking these dramatic steps, the regulators aimed to give investors and lenders faith in Citigroup's ability to continue operating after its stock fell about 60 percent last week to $3.77. The government's earlier investment this fall was meant to shore up Citigroup's capital, but those efforts are no longer preventing a dramatic erosion of confidence in the company.
The federal initiative would represent yet another massive government intervention in the financial system as officials have scrambled to try to contain a crisis that has already brought down a dozen of the nation's largest banks and investment companies.
This time, though, the company in jeopardy is truly gigantic. Citigroup is the largest U.S. bank by assets, with $2 trillion on its books. By contrast, Wachovia, which became the biggest bank to be done in by the financial crisis after being forced to sell itself to Wells Fargo this fall, has just over one-third as many assets.
Citigroup engages in almost every form of financial transaction available to banks and investment firms, making it heavily involved with almost every other large financial institution in the world. It is also deeply integrated into the nation's financial history.
In the 1920s, a firm called First National City Bank started repackaging bad loans from Latin America and selling these to investors as safe securities. These investments collapsed in grand fashion after the 1929 stock market crash and eventually led to a new wave of securities regulation. National City Bank became Citibank, which in turn became a major unit of Citigroup.
Citigroup has incurred billions of dollars in losses in the past 18 months, once again by partly repackaging bad loans into what were viewed as safe securities.