Monday, November 24, 2008

Citigroup gets govt rescue

Citigroup is looking at putting risky assets in a 'bad bank' - a step to reassure investors that the rest of its assets were safe. -- PHOTO: REUTERS

WASHINGTON - THE US government unveiled a bold plan on Sunday to rescue troubled Citigroup, including taking a US$20 billion (S$30.6 billion) stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp (FDIC), is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the US economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

'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 in a statement issued on Sunday night.

'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,' they said.

It is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase's buyout of ailing Bear Stearns. Six months later, the government was forced to take over mortgage giants Fannie Mae and Freddie Mac and throw a financial lifeline - which was recently rejiggered - to insurer American International Group.

Critics worry the actions could put billions of taxpayers' dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.

The US$20 billion cash injection by the Treasury Department will come from the US$700 billion financial bailout package. The capital infusion follows an earlier one - of US$25 billion - in Citigroup in which the government received an ownership stake.

As part of the plan, Treasury and the FDIC will guarantee against the 'possibility of unusually large losses' on up to US$306 billion of risky loans and securities backed by commercial and residential mortgages.

Under the loss-sharing arrangement, Citigroup will assume the first US$29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 per cent of the remaining losses, and Citigroup 10 per cent.

Money from the US$700 billion bailout and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The agreement also places restrictions on executive compensation, including bonuses.

The once mighty company had at one time been the largest US bank by assets.

Citigroup has seen its shares lose 60 per cent of their value in the past week, reflecting a crisis of confidence among skittish investors. They are worried all the risky debt on Citigroup's balance sheet will turn into losses as the economy worsens and the markets stay turbulent - losses that could be nearly impossible to reverse.

Citigroup is such a large, interconnected player in the financial system that if it were to collapse it would cause further damage to already fragile financial and economic conditions. The company has operations stretching around the globe in more than 100 countries.

Analysts consider Citigroup the most vulnerable among the major US banks - especially after it failed to nab Wachovia Corp, which was bought instead by Wells Fargo & Co. That was a missed opportunity for Citi to gets its hands on much-needed US deposits that would bolster its cash position.

Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments.

The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs. -- AP

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