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US government puts up $300bn in Citigroup rescue

The US government pulled Citigroup back from the abyss yesterday with a comprehensive bail-out that saw taxpayers guaranteeing $306bn of risky assets and injecting $20bn of capital into the banking group.

The move gave a sharp boost to global stockmarkets with the FTSE 100 enjoying its best-ever one-day percentage rise. President Bush said he consulted his successor-in-waiting, Barack Obama, about the rescue package, which sets a precedent for federal intervention. Under the deal the government will:
  • shoulder 90% of any losses on $306bn worth of residential and commercial property mortgages;
  • shore up Citigroup's balance sheet by acquiring $20bn in preferred shares, plus $7bn of stock as a "fee" for guaranteeing risky assets;
  • hold a veto over executive pay and dividend policy at the bank.

The agreement signals a shift in government strategy towards ailing banks following the much-criticised decision by the US treasury secretary, Henry Paulson, to let Lehman Brothers go bankrupt in September, causing a new bout of turmoil on the stock and credit markets.

In a joint statement, the three agencies that underwrote the bailout - the Federal Reserve, the treasury department and the Federal Deposit Insurance Corporation (FDIC) - said the rescue plan was "necessary to strengthen the financial system and protect US taxpayers and the US economy".

Vikram Pandit, Citigroup's chief executive, thanked the government for its "unprecedented" intervention: "We appreciate the tremendous effort by the government to assure market stability."

Although the jobs of Pandit and his senior colleagues are not under immediate threat, the financial rewards for executives and shareholders are fettered under the deal. Executive pay and bonuses must be approved by the government and the quarterly dividend will be slashed from 16 cents to no more than one cent for the next three years.

One Citigroup shareholder said the government had bailed out an "inept" management board. "I cannot believe that the management team is allowed to stay. This is like giving an arsonist a box of matches," said William Smith, chief executive of Smith Asset Management.

The deal, brokered by Ben Bernanke, Federal Reserve chairman, Paulson and his successor, Tim Geithner, New York Federal Reserve president, could see the government owning 7.8% of Citigroup.

Citigroup will absorb the first $29bn of losses in the ring-fenced portfolio and will cover 10% of the losses thereafter, giving it a maximum exposure of $56.7bn. The bank was bullish yesterday about seeing out the credit crunch. It said its tier-one capital ratio, the cushion of capital that must be held to protect savers, would, at 14.8%, be more than double government requirements following yesterday's deal.

It is Citigroup's second bail-out from the US treasury's $700bn Troubled Assets Relief Programme, which injected $25bn into the bank last month. A further $20bn under the new arrangement will come from the same source. Within the toxic debt portfolio, the treasury will absorb $5bn of losses, the FDIC will be accountable for $10bn and the Federal Reserve up to $234bn as a backstop for the remainder.

Meredith Whitney, the Wall Street analyst who first warned of Citigroup's troubles, said the group might need more capital infusions but the banking sector should be buoyed by the deal: "Clearly, this will stabilise the group near term."

Citigroup has assets of $2tn but is exposed to $1.23tn of off-balance-sheet items that are seen as potentially toxic.

Source: Guardian
Date: 25.11.2008 [208]

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