Citi dodges bullet
Government will guarantee losses on more than $300 billion in troubled assets and make a fresh $20 billion injection.
NEW YORK (CNNMoney.com) -- The U.S. government on Sunday announced a massive rescue package for Citigroup - the latest move to steady the banking giant, whose shares plunged in the past week on fears about the bank's health.
The plan has two key features:
First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.
Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.
Investors liked the news. Citigroup shares gained 65% in morning trading. Major U.S. indexes soared at the start, with the Dow Jones industrial average climbing nearly 4%, while European markets were sharply higher.
Citigroup, which ranks as the nation's fourth-largest bank based on deposits and employs more than 300,000 workers, has been one of the hardest hit financial firms since the mortgage market first started to unravel in the fall of 2007.
Over the past four quarters, the company has recorded close to $21 billion in losses.
The goal of the package was to restore confidence in Citigroup and the nation's banking system. Shares of the firm plummeted in value last week on fears about Citigroup's exposure to toxic mortgage securities.
"This is an important deal," said Gary Crittenden, Citigroup's chief financial officer. "It's important for Citi and its important for the industry broadly."
"It also signals the fact that the federal government is committed to the stability of the financial system broadly and in particular that they're committed to Citi's successful participation in it."
In return for the latest intervention, the government will receive a larger stake an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.
In addition, the government will get warrants, or the right to purchase $2.7 billion worth Citigroup shares in the future.
The government will impose restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share for the next three years and will face limits on executive compensation.
Plus, Citigroup will be expected to adjust mortgages for troubled borrowers, using procedures similar to those the FDIC implemented at IndyMac, which it took over last summer.
Under the terms of the Citigroup rescue package, the bank would be on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. It would cover 10% of losses above that amount, with the government shouldering the rest.
Despite the massive rescue effort, regulators did not push for a management change at Citigroup. In recent days, there had been speculation that Citigroup CEO Vikram Pandit could step down. There had also been talk that the company was considering replacing Chairman Sir Win Bischoff, although the company denied such reports.
Last week, fears about Citigroup's fate rattled equity markets around the globe and sent shares of the 196-year-old firm plummeting to levels not seen in over a decade.
By the end of the week, Citigroup shares lost close to two-thirds of their value, even as the company announced plans to layoff more than 50,000 workers and as its largest individual shareholder upped his stake.
The most recent slide in Citigroup stock comes on the heels of news earlier this month that the Treasury Department was abandoning its initial rescue plan to buy troubled assets from banks - Citigroup had been seen as a major beneficiary of that strategy.
Instead, as part of the $700 billion bailout package that was signed into law in early October, Treasury has focused on making direct investments in banks. In exchange for equity stakes, the agency has injected $25 billion into Citigroup and an additional $100 billion into eight other major U.S. financial institutions.
Top regulators, including Federal Reserve Chairman Ben Bernanke and Timothy Geithner, president of the New York Fed, were both involved in the weekend talks over Citigroup's fate. Geithner is expected to be nominated to be Treasury Secretary by President-elect Barack Obama.
There had been concerns that had the government not stepped in, the New York City-based bank could have gone under throwing both the U.S. economy and the global financial system into further turmoil.
"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," Treasury, Federal Reserve and the FDIC said in a joint statement.
Despite the recent events, many industry experts had stressed that Citigroup is relatively healthy. Two veteran banking analysts - Mike Mayo of Deutsche Bank and Ladenburg Thalman's Richard Bove - both advised clients last week that Citigroup could survive substantial loan losses.
The move to prop up Citigroup, however, will certainly raise eyebrows on Capitol Hill.
Sen. Richard Shelby, R-Ala., the ranking member of the Senate Banking Committee, was one lawmaker who voiced opposition to extending additional aid to Citigroup in an interview on ABC's "This Week".
"Citi has got to save itself," said Shelby. "For the government to say we're going to save Citigroup, I think that's a mistake."
While he did not condemn the Citigroup rescue package altogether, House Financial Services Chairman Barney Frank, D-Mass., said that immediate steps needed to be taken to stem the tide of foreclosures for American homeowners.
"It is essential that TARP funds be used immediately to fund mortgage foreclosure relief," Frank said in a statement.
But many analysts wondered whether Citigroup even had another option. No other financial seemed willing or able to buy the bank and arguably there were few peers that the company could merge with. Selling assets would certainly raise cash for the company, albeit at distressed prices. Such a move would also do little to address concerns about the toxic assets on its balance sheet.