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Citi Group receives early Christmas present

Blog by Shaun Kimmins | November 24th, 2008

U.S. bails out Citi with $20 billion capital, guarantees

By Dan Wilchins and Jonathan Stempel

NEW YORK (Reuters) - The U.S. government moved to bail out Citigroup Inc, agreeing to shoulder most potential losses from $306 billion of its toxic assets and inject $20 billion of new capital, its biggest effort yet to prevent a big bank from failing.

The bailout, announced on Sunday, will give the U.S. government a 7.8 percent equity stake and marks the latest government effort to contain a widening financial crisis that has already brought down Bear Stearns, Lehman Brothers Holdings Inc and Washington Mutual Inc.

Shares of Citigroup surged as much as 72 percent on Monday. The price of insuring $10 million of Citigroup bonds through credit-default swaps fell by about one-half to $257,000 per year.

"Clearly, this will stabilize the (banks) group near term, and the stocks this morning should reflect it," Oppenheimer & Co analyst Meredith Whitney said. "We are still cautious on the potential future dilution from further prospective capital raises for the group as well as continued higher losses related to credit and asset deflation."

Whitney, who last year warned investors the bank was not as healthy as it appeared, rated the shares as "underperform." Citigroup's stock is still below the $8.90 it fetched a week ago and is down 87 percent this year.

Citigroup received the latest infusion after its shares plunged 60 percent last week to $3.77 amid growing concern it lacked enough capital to survive, and less than a week after it set plans to slash 53,000 from its work force of 353,000.

The stock rose $2.22, or 59 percent, to $5.99 on the New York Stock Exchange after rising as high as $6.50.


The $20 billion of U.S. government capital is in addition to $25 billion it injected into the bank last month. The government is buying preferred stock that will pay an 8 percent dividend.

In exchange for the bailout, Citigroup slashed its quarterly dividend to a penny per share from 16 cents. It cannot raise the dividend for three years without U.S. consent.

Even so, taxpayers are now on the hook for nearly $250 billion of losses resulting from the bank's missteps.

"The authorities will do whatever they feel is necessary to ensure that the Great Depression will not return," said Gavin Graham, director of investments at BMO Asset Management in Toronto. "The effect on confidence is too great." Graham manages about $50 billion and owns some Citigroup debt.

Citigroup will absorb the first $29 billion in losses on a $306 billion portfolio of loans and trading assets, plus 10 percent of any additional losses, for a maximum total exposure of nearly $57 billion. Treasury, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest.

In return, Treasury and the FDIC will get $27 billion in preferred shares as well as warrants to buy $2.7 billion in Citi common stock at $10.61 per share.

"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview. 

Citigroup estimated the injection will give it a Tier 1 capital ratio of 14.8 percent, more than twice what the government requires. The government also increased Citi's access to the Fed's discount window, adding liquidity.


The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

Citigroup has one of the farthest international reaches of any U.S. bank, with operations in more than 100 countries. Investors have long speculated the government deemed it too big to fail because a collapse could cause global financial havoc.

The government package may become a template for other U.S. banks expected to face growing losses as the economy contracts. Losses once concentrated in mortgages are bleeding into other areas such as credit cards and commercial real estate.

The rescue magnifies the U.S. government's burden following bailouts of insurer American International Group Inc, Bear Stearns and mortgage finance giants Fannie Mae and Freddie Mac. Treasury also has injected more than $300 billion into banks and other financial institutions.

Already, more than $1 trillion of taxpayer money is at risk, and the Big Three automakers are seeking $25 billion more to avert bankruptcy. President-elect Barack Obama may also seek up to $700 billion for economic stimulus.

Earlier this month, U.S. Treasury Secretary Henry Paulson said a $700 billion industry rescue package to soak up toxic assets from troubled banks, like Citigroup, will instead only be used to inject capital into banks.

That decision sent mortgage and other debt markets into a steep decline.

Citigroup's problems were compounded by its decision to move or buy back tens of billions of dollars of assets that had been held off its balance sheet back onto its books.

Citigroup's market value on Friday was just $20.5 billion, down from more than $270 billion two years ago -- and even below the $25 billion initial U.S. capital injection.

In contrast to other U.S. company bailouts, Chief Executive Vikram Pandit and other top managers were not asked to resign, though the government will have the final say on compensation. Not all investors were pleased.

"You're seeing an inept management team being rewarded by the U.S. government," said William Smith, whose Smith Asset Management in New York has seen its Citigroup stock plunge in value over the years.

(Additional reporting by Glenn Somerville in Washington and Joe Giannone and Jonathan Spicer in New York, editing by Steve Orlofsky/Jeffrey Benkoe)


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