Federal Reserve and US Treasury may create a special vehicle to purchase bad assets from Citi
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(NEW YORK) The US government may step in to rescue Citigroup Inc after a crisis in confidence erased half the bank's stock market value in three days, according to investors and analysts.
Citigroup's US$2 trillion of assets dwarfs companies such as American International Group Inc (AIG) that got support from the US government this year. Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke may favour a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc's bankruptcy in September.
One option is for the Federal Reserve and US Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility (CPFF), to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as US$50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.
The arrangement allows the Fed to leverage the money provided by the Treasury with loans, enabling the purchase of assets worth a multiple of the money. Funding the purchases with loans makes them less onerous to the US Budget.
'That is the working relationship they have settled into with the Fed providing US$1 trillion of the funding and the Treasury providing the equity tranche,' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
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Citigroup management and some board members discussed 'several options' for the company in a series of phone conversations with Mr Paulson and New York Federal Reserve Bank president Timothy Geithner last Friday, The New York Times reported on Saturday, citing unidentified people involved in the talks.
Among those options were the possible replacement of chief executive officer Vikram Pandit, a public endorsement of Citigroup by the government or a new financial lifeline, the Times said. No decisions had been taken as at late Saturday.
While Citigroup executives said that the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating companies. A similar scenario played out at Lehman, when chief executive officer Richard Fuld declared that the firm was 'on the right track' five days before the firm went bankrupt.
'The market may be implying some sort of regulatory intervention,' Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients on Saturday. 'In situations where the government has stepped in, the equity holders have not fared well.'
Mr Pandit told employees on Friday that he does not plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 US cents, or 20 per cent, to US$3.77 in New York trading, giving the company a market value of about US$21 billion. The stock pared its loss after the close of official trading, fetching US$4.07 at 4.35 pm.
Mr Pandit and chief financial officer Gary Crittenden, speaking on a worldwide conference call on Friday, also said that they do not expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it was not open to the public.
Once the biggest US bank, with a market value of US$274 billion at the end of 2006, Citigroup has now slipped to No 5 behind Minneapolis-based US Bancorp.
To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said that the bank's balkanised culture and pell-mell management made problems inevitable. -- Bloomberg, NYT
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