The U.S. government has agreed to guarantee over $300 billion of Citigroup's troubled assets -- loans and securities backed by residential and commercial real estate and other such assets -- with conditions attached. These conditions are being hammered out.
In addition, the U.S. Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program (TARP) in exchange for preferred shares with an 8 percent dividend. Citigroup will comply with enhanced executive compensation restrictions and implement the Federal Deposit Insurance Corp's mortgage modification program. This is on top of the $25 billion that the government gave Citi in October.
In a late-night announcement after a weekend of talks about what to do to help Citi, the Treasury also said it and the FDIC will provide protection against losses in a pool of about $306-billion worth of loans and securities on Citigroup's balance sheet. The Treasury said the U.S. Federal Reserve stood ready to backstop any additional risk in the asset pool through an offer of a non-recourse loan.
"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy", the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation said in a joint statement.
No Plans For Federal Takeover Of Citi
The government officials decided against taking over Citigroup in the way it took control of AIG — by lending the firm massive amounts of money and in return assuming a huge equity position.
Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup's balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.
Still, officials from the Treasury and Citigroup are unsure what it would take to restore confidence in the company, including a possible smaller capital injection or some sort of statement that Citigroup is financially sound. (Citi CFO Gary Crittenden's comments, left.)
For that reason, Citigroup officials are continuing to explore possible merger possibilities and a spin off of some of Citigroup's businesses, even as CEO Vikram Pandit publicly stated the sale of the firm's massive and coveted broker business, Smith Barney is off the table, these people say.
Both officials at Citigroup and in the government concede the situation facing Citigroup is daunting. Because of Citigroup's size and scope—it operates in just about every country and competes in just about every financial business, the company's survival is a national concern.
Citigroup has spent the past week telling investors that its capital position is strong, but investors have lost confidence in the current management led by CEO Vikram Pandit who has been in the job less than a year, and the firm's board, which appeared to ignore widespread calls by analysts to integrate the firms operations and slash its massive workforce until recently.
Meanwhile, various merger possibilities seem slim. A deal with investment banks Morgan Stanley or Goldman Sachs would create massive overlap and would lead to huge layoffs. There aren't many banks with a strong deposit base that Citigroup can buy with its depressed stock price.
(Watch the full Charlie Gasparino Citigroup report on the left)
Pandit, for his part, has cut the workforce to 350,000 from 375,000 and just announced another 50,000-job cut by early 2009. But for investors, those moves were too little too late. Just a year ago, Citigroup's share traded at around $50.
Citigroup's shares fell 60 percent last week to $3.77 amid concerns about the bank's loan exposure amid a recession hurting many economies globally. Citi shares failed to rebound on Friday, even as the Dow Jones Industrial Average of large company stocks spiked nearly 500 points on the news that President-elect Barack Obama will name NY Fed President Tim Geithner as his new Treasury Secretary.
Because Citigroup is a bank it has access the the Federal Reserves discount window, and because of its size, there is virtually no possibility of the bank failing and filing for bankruptcy as investment bank Lehman Brothers did. "Citigroup is too big to fail; the government wont allow that because the firm is involves in so many business both institutional and consumer around the world," said one bond trader with detailed knowledge of Citigroup's operations.
But the lack of confidence coupled by the falling stock price could pose other problems, such as a run on bank deposits, where worried depositors yank their money from their Citigroup accounts, or investors pulling their funds from their Smith Barney brokerage accounts. A Citigroup spokesman declined to say if the company is experiencing either of those scenarios.
For that reason, Citigroup officials continue to work over the weekend to possibly unveil some sort of plan of action by Monday morning. "Everyone knows saving Citigroup is important to saving the economy, but no one knows what to do," said one person close to the firm.