Rubin, Paulson, Geithner a Familiar Trio at Heart of Citigroup Bailout
Tuesday, November 25, 2008
The bailout of Citigroup, which put the government at risk of hundreds of billions of dollars of losses, was set in motion by three men whose professional lives have long been intertwined.
Treasury Secretary Henry M. Paulson Jr.; Citigroup board member Robert E. Rubin; and Timothy F. Geithner, the president of the Federal Reserve Bank of New York, have for years followed one another in and out of jobs in government and industry. Their close relationships helped pave the way for one of the largest and most dramatic government interventions to date in the financial crisis.
The bailout, announced late Sunday night, was designed to make a statement, officials said. In agreeing to protect Citigroup against potential losses on a $306 billion pool of troubled assets, the government made clear that it was not going to allow one of the nation's largest financial firms to collapse.
Yesterday, the markets cheered the rescue, sending Citigroup's shares soaring 58 percent while the Dow Jones industrial average climbed 4.9 percent, or 396.97 points.
The bailout came only days after Paulson made comments that many in the financial markets took to mean that he would leave any future bailouts to the Obama administration. But once Citigroup's stock price plunged 60 percent last week, Rubin, an old colleague from Goldman Sachs, told Paulson in phone calls that the government had to act, according to industry sources familiar with their discussions.
Geithner, too, shared a close relationship with the pair. He worked for Rubin at the Treasury Department in the 1990s and now is President-elect Barack Obama's nominee to follow Paulson as Treasury secretary.
As Citigroup's lead regulator, Geithner was deeply involved in the rescue of the firm, participating in meetings and conference calls with Paulson through the weekend. He did, however, withdraw from direct interactions with Rubin and other Citigroup leaders in these negotiations after his name was leaked as Obama's nominee, according to people familiar with the discussions.
The government is guaranteeing a total of $306 billion of Citigroup's assets against losses greater than $29 billion. In exchange, it is requiring the firm to hand over $7 billion worth of preferred stock, essentially paying the government an insurance premium.
The government is not firing Citi's executives, but it is requiring that their compensation be approved by federal authorities under terms that are not yet finalized. And it is requiring that the bank help people at risk of losing their homes avoid foreclosure by using the same aggressive approach that the Federal Deposit Insurance Corp. has required of IndyMac, a California-based bank it took over in July.
Regulators also prohibited Citigroup from paying dividends to common shareholders of more than a penny a share in the coming three years and required a dividend payment of 8 percent on the government's preferred stock -- higher than the 5 percent dividends that it required of institutions that took rescue money from the Treasury Department over the past few weeks.
The Treasury also has the option of buying warrants in Citigroup if the firm's shares recover. If that happens, the government would end up owning slightly less than 8 percent of the bank's shares.
"It strikes me as unbelievably generous," said a former Fed official who has been in touch with Citigroup. "I'm sure it will be controversial. . . . They are purifying the balance sheet with two intentions, so Citi's creditors and shareholders are reassured. And because the creditors are reassured, presumably their lines of credit won't be cut off. Citi, with that kind of confidence, can do what banks are supposed to do."