US authorities to get US$27b worth of preferred shares in exchange for cash, guarantees
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(NEW YORK) Federal regulators have approved a radical plan to stabilise Citigroup, in a complex arrangement in which the government could soak up tens of billions of dollars in losses at the struggling bank, the government announced on Sunday night.
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The plan calls for the government to back about US$306 billion in loans and securities and directly invest about US$20 billion in the company. This is in addition to the US$25 billion the company received last month under the Troubled Asset Relief Programme. In return for the cash and guarantees, the government will get US$27 billion of preferred shares paying an 8 per cent dividend.
Citigroup executives presented a plan to federal officials on Friday evening after a week-long plunge in the company's share price threatened to engulf other big banks. In tense, around-the-clock negotiations that stretched through the weekend, it became clear that the crisis of confidence had to be defused or the financial markets could plunge further.
Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks.
If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing stockholders, whose shares have plunged 87 per cent this year. A year ago they were trading at about US$30; on Friday they closed at US$3.77.
If the plan works, the package may become a template for other US banks expected to face growing losses as the economy sinks into recession. Credit losses once concentrated in mortgages are already bleeding into other areas such as credit cards and commercial real estate.
Banking industry officials said the decision to support Citigroup, while necessary, would draw fire from smaller institutions that are not big enough to be saved.
'This is going to create a firestorm,' said a banking industry insider. 'What do you say to people like Wachovia or National City or smaller or mid-size banks?'
Under the agreement, Citigroup and regulators back up to US$306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank's balance sheet.
Citigroup will shoulder losses on the first US$29 billion of that portfolio.
Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 per cent and the government absorbing 90 per cent. The Treasury Department will use its bailout fund to assume up to US$5 billion of losses. If necessary, the Federal Deposit Insurance Corporation (FDIC) will bear the next US$10 billion of losses.
In exchange, Citigroup will issue US$20 billion in preferred stock to government agencies, a move that would give taxpayers a benefit but could hurt existing shareholders. The preferred shares will pay an 8 per cent dividend.
Citigroup will also agree to certain executive compensation restrictions and put in place the FDIC's loan modification plan, which is similar to one it recently embarked on.
Inside Citigroup's Park Avenue headquarters, the mood was tense.
Through the weekend, Robert E Rubin, the former Treasury Secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M Paulson.
Vikram S Pandit, Citigroup's chief executive, spoke to regulators and lawmakers. Mr Pandit also met Citigroup's board on Saturday, and there was no indication that they would seek to replace him.
Once the nation's largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating.
With more than US$2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Indeed, Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
Even so, federal regulators want to restore confidence in the company without being seen as bailing out its shareholders.
Giving his take on the developments, Jonathan Larsen, country head and Citi country officer, Singapore said: 'Today's announcement brings even greater clarity to our overall financial standing and ability to deliver the best service to our customers. It will also provide reassurance to our customers with respect to the strength of Citi's global franchise.' - NYT, Reuters
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