U.S. rescues giant Citigroup

Gosselin writes for our Washington bureau.

The federal government rushed to the aid of faltering banking giant Citigroup Inc. late Sunday night, agreeing to invest $20 billion more and accept the lion’s share of losses on more than $300 billion worth of the firm’s troubled mortgage-backed assets.

In the largest single rescue effort thus far in the current financial crisis, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. will shoulder 90% of the losses on most of a $306-billion portfolio of toxic mortgages and related securities.

The company will cover the first $36 billion of losses, but beyond that will see its risk of loss shrink drastically.


In return for the protection and aid, Citigroup will grant Washington nearly $30 billion of preferred shares and warrants. The firm will give the government sweeping powers over its operations, allowing it to effectively prohibit stock dividends for the next three years and pass judgment on all executive pay packages.

And the company will agree to try to modify mortgages in the huge portfolio, using standards designed by the FDIC after the collapse of IndyMac Bank in Pasadena to keep as many homeowners as possible in their houses.

Washington acted after Citigroup became the latest -- and largest -- financial institution to see a sell-off of its stock. The New York company lost 60% of its value in Wall Street trading last week and nearly 90% since the start of the year.

The company is one of the best-known banking operations in the world with nearly $2.2 trillion in assets and more than 200 million customers in 106 countries.

Citigroup already has received $25 billion from Treasury as part of the department’s $700-billion financial rescue scheme. In return, Washington received an ownership stake in the firm. The $20-billion investment also comes from the department’s Troubled Asset Relief Program.

“This weekend, the U.S. government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi’s stock price,” said Chief Executive Vikram S. Pandit. “We appreciate the tremendous effort by the government to assure market stability.”

Government officials, briefing reporters late Sunday, made clear they believed that permitting any further trouble at Citigroup could shake investor and depositor confidence in the global financial system and dramatically deepen what already is the country’s worst financial crisis since the Great Depression.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement.

“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.”

Prior to the Citigroup rescue, Washington’s largest commitment of funds to an individual company was its promise to buy as much as $200 billion of special stock in mortgage giants Fannie Mae and Freddie Mac. Of course, the government has spent vastly larger sums seeking to unfreeze the commercial paper market and the market in short-term loans among banks.

For Citigroup’s top management -- including Pandit and senior counselor and director Robert Rubin -- the government rescue represented an abrupt and humbling about-face.

As recently as last Thursday, Pandit was declaring that the stock drop posed no financial danger to the company and that he had no intention of selling off pieces of the business in order to raise money.

But by Friday with Citigroup shares still falling even amid a market rally, executives had little choice but to seek help. The shares ended up losing $5.75 for the week, closing Friday at $3.77 a share. The executives presented a rescue plan Friday evening, setting off around-the-clock negotiations that lasted well into the night Sunday.

Among those at the table: Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke and Timothy F. Geithner, the head of the Federal Reserve Bank of New York and President-elect Barack Obama’s pick for the top Treasury post.

Obama, kept informed of the negotiations by Geithner, did not sign off on the result. The Democrat sought to bolster confidence on his own Saturday, signaling in a radio address that he is preparing to pursue a much more sweeping economic agenda than he described during the campaign. Some congressional allies said that the next president’s program could involve as much as $700 billion to $900 billion of new spending and tax cuts over several years.

Under terms of the rescue package, Washington will provide what amounts to loss insurance on the $306-billion portfolio, most if it loans and securities on residential and commercial real estate. The company will cover the first $29 billion in losses. Government officials said that amount will be on top of about $7 billion in reserves that it has set aside in case of losses, bringing to $36 billion the amount that the firm will handle.

Responsibility for accepting the risk of losses on most of the remaining $270 billion will be divvied up among government agencies, with Treasury handling $5 billion through its recently approved troubled assets program, and the FDIC responsible for $10 billion and the rest falling to the Fed.

Terms of the new rescue package are considerably more lenient than those the government imposed on failing insurer behemoth American International Group Inc. In AIG’s case, Washington required that the company’s current management leave and demanded a near-80% ownership stake before helping the firm.

Government officials made it clear that they did not want to impose punitive terms on Citigroup because its stability was crucial to protecting the financial system.

In March of this year, the Fed agreed to assume the management -- and risk -- of nearly $30 billion in troubled assets from Bear Stearns Cos. to pave the way for the investment house’s fire sale to J.P. Morgan Chase & Co.

Last month, the FDIC agreed to bear losses above a certain threshold on troubled assets of Wachovia Corp. to facilitate Citigroup’s purchase of the country’s No. 4 banking firm. The deal ultimately fell through when Citigroup found itself outbid for Wachovia by Wells Fargo & Co.