Citi gets US$20b govt aid

The Straits Times
Nov 24, 2008 | 1:23 PM
Citi gets US$20b govt aid

WASHINGTON - THE 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, 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 stocks 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.

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.

In addition, 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.

Earlier, Citigroup was looking at putting risky assets in a government-supported 'bad bank' - a step to reassure investors that the rest of its assets were safe, a person briefed on the matter said on Sunday.

The 'bad bank' might take on US$100 billion (S$152.9 billion) of Citigroup's assets, although that number is still being discussed.

Citigroup might bear the initial losses on the assets, and the government might cover losses beyond a particular threshold, the person said.

The US government may take a stake in Citigroup in exchange for taking most of the losses, the New York Times reported.

Citigroup spokesman Mike Hanretta declined to comment.

Talks are still fluid, the person said. CNBC reported that the government's main priority is to give Citigroup a US$10 billion to US$20 billion equity infusion, but that would not necessarily preclude other actions to bolster the bank.

Any government infusion would be in addition to the US$25 billion that it gave Citigroup in October.

But any 'bad bank' plan would be similar to what the US$700 billion Troubled Assets Relief Programme was set up to do: take over bank assets that were either troubled or likely to be troubled. The Tarp, signed into law last month, has since shifted its focus on giving direct capital injections to banks, in part because of difficulties in determining how it would buy assets.

US financial markets are waiting for some sort of Citigroup announcement this weekend, analysts said.

'A lot of people are looking for some news by Monday,' said Mr Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.

Citigroup's shares fell 60 per cent last week to US$3.77 amid concerns about the bank's loan exposure amid a recession hurting many economies globally.

The bank is not in danger of near-term collapse, people close to Citigroup said on Friday. Depositors are sticking with the bank, as are trading counterparties. The capital ratio that regulators look at most carefully, namely the tier-one capital ratio, is well above minimum required levels.

But a rapid decline in share price can make customers skittish and cut into a bank's business, wrote analysts at independent research boutique CreditSights on Saturday.

'Unfortunately, we feel like we have seen this movie before,' they added. Lehman Brothers Holdings and Washington Mutual both experienced sharp declines in their shares, followed by an exodus of customers. Lehman eventually filed for bankruptcy, while regulators took over Washington Mutual and sold its assets to JPMorgan Chase & Co.

A surprise turn
Citigroup's executives last week debated options as the company's share price sank, including merging with another bank or selling off businesses. Citigroup also spoke to the Federal Reserve and the US Treasury about the government making a public statement of support and perhaps even putting additional funds into the bank.

And Chief Executive Vikram Pandit told employees on a conference call last week that the bank was strong and had no liquidity problems.

Giving bad assets to the government could help Citigroup, but would also be a surprise turn, given the difficulties the Tarp programme ran into in when it tried to buy assets.

'Buying assets, that's exactly the position the government didn't want to be in,' said Mr Daniel Alpert, a banker at Westwood Capital.

The Financial Times reported on Sunday that the board was meeting to discuss the bank's future. -- REUTERS, AP