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WASHINGTON - The US government is promising to protect struggling banking giant Citigroup against large losses by issuing a 306-billion-US-dollar guarantee for its capital and purchasing a 20-billion-US-dollar stake in the company using a financial rescue package approved by Congress.
The announcement came shortly before midnight Sunday, after the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation reached an agreement with Citigroup to provide a package of guarantees to the bank saddled with staggering losses.
In a joint statement issued after the talks, the three agencies said they will provide Citigroup "protection against the possibility of unusually large losses on an asset pool of approximately 306 billion dollars of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet."
In addition, the Treasury Department will invest 20 billion dollars in Citigroup from the Troubled Asset Relief Program, a 700-billion-US-dollar package approved by Congress earlier this year to soften the effects of the banking crisis, in exchange for preferred stock with an eight-percent dividend to the Treasury, officials said.
Citigroup, on its part, has agreed to comply with unspecified "enhanced executive compensation restrictions" and implement the FDIC's mortgage modification programme.
"With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy," the three agencies said. "We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks."
But the agencies promised to, as they put it, to "carefully circumscribe the involvement of government in the financial sector."
Citigroup, for its part, said will issue seven billion dollars worth in preferred stock to the US Treasury and the FDIC as payment for the 306-billion-US-dollar guarantee.
Citi will also give the government warrants for approximately 254 million shares of the company's common stock at a strike price of 10.61 US dollars a share.
The bank also has agreed to suspend paying a quarterly common stock dividend for three years.
The guarantee calls for Citi to assume any losses on the portfolio up to 29 billion US dollars and for the government to assume 90 per cent of any losses above that level, according to the company statement.
Vikram Pandit, Citi's chief executive officer, said the bank appreciated "the tremendous effort" by the government to assure market stability.
"We are committed to streamlining our business and providing outstanding banking services to our clients around the world," Pandit added.
Heavily involved in the negotiations with Citigroup is Timothy Geithner, who is scheduled to be named President-elect Barack Obama's Treasury Secretary later Monday, according to The Washington Post.
Geithner is president of the New York Federal Reserve branch, which is Citi's primary regulator.
The deal had been expected on Wall Street on Friday when Citigroup shares were in free fall, with investors skeptical about the bank's ability to recover without outside help.
Shares of Citigroup, a component of the blue-chip Dow Jones Industrial Average, have tumbled more than 70 per cent since the start of the year, with the bank hit by hefty write-offs linked to the US real estate crisis.
Stock prices for the New York City-based company closed at 3.77 US dollars on Friday, their lowest level in years.
Last Monday, the bank announced it was slashing a near-record 50,000 jobs worldwide to cope with the global financial crisis and heavy losses. At its peak last year, the company employed 375,000 people.
Last month, Citi reported a third-quarter loss of 2.8 billion US dollars, its fourth straight quarter in the red.
The troubled bank is saddled with billions of dollars in losses tied to mortgage investments that lost value in the collapse of the US real estate market and the credit squeeze that erupted last year.
But Citi operates in over 100 countries and, with more than two trillion US dollars in assets, is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
The US Treasury Department used similar justification when it bailed out insurance giant American International Group (AIG) in late September.
The ailing bank was among the nine big US banks that agreed last month to give the US government equity stakes in exchange for a combined 125 billion US dollars under a 700-billion-US-dollar financial sector rescue plan. Citi got a 25-billion-US-dollar injection.
Since last year Citi has raised more than 50 billion US dollars to shore up its balance sheet, reduced its investment portfolio by more than 100 billion US dollars, reorganized activities and sold several businesses, such as CitiStreet, CitiCapital, BPO in India and a retail bank in Germany.
- AFP/vm/ir
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