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Citigroup To Receive Government Rescue Package - update 2


Financial services giant Citigroup, Inc. (C) Monday announced an agreement with the U.S. government by which the government will provide a package of guarantees, access to additional liquidity resources, and capital in an effort to strengthen the beleaguered bank's capital ratios and liquidity, and reduce risk. The bank said the program, which was unanimously approved by its Board of Directors, will significantly strengthen its key capital ratios by generating approximately $40 billion of capital benefits.

A joint statement issued by the Federal Reserve, Federal Deposit Insurance Corp., or FDIC, and the U.S. Department of Treasury on Sunday said the actions are taken to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

Among U.S. banking firms, Citigroup has been the hardest hit by the credit crisis, having lost more than $20 billion over the past one year due to massive write-downs of bad debts. The black hole is the bank's significant exposure to credit derivatives, the riskiest sector of the derivatives market. With a $3.6 trillion portfolio, the bank is the second-largest player in credit derivatives.

Citigroup's shares have been hammered over the past week and fell below $4 a share on Friday as investors feared that the company's exposure to risky assets would turn into losses amid the economic slowdown and market slump.

Citigroup also posted four consecutive quarterly losses, while rivals JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) managed to turn a profit. The bank's global cards and consumer-banking business, which accounted for more than two-thirds of its total revenue in the third quarter, is unraveling quickly with falling revenues and growing delinquencies in the consumer loans portfolio.

Under the deal, Treasury and the FDIC will provide Citigroup protection against the possibility of unusually large losses on an asset pool of about $306 billion of loans and securities on residential and commercial real estate and other such assets, which will remain on the bank's balance sheet. As a result of the asset guarantee, the $306 billion portfolio will have a new risk weighting of 20%, freeing up an additional $16 billion of capital to the company.

Under the guarantee, Citigroup said, it will assume any losses on the portfolio up to $29 billion on a pre-tax basis, in addition to its existing reserves. The government entities will assume 90% of any losses above that level and the bank will assume the balance. The bank will also retain these assets on its balance sheet and realize the associated cash flow.

According to media reports, the holdings guaranteed by the government include a portion of the bank's $400 billion of mortgages, bonds, auto loans and corporate loans that Citigroup's chief executive officer Vikram Pandit pledged in May to shed within three years.

Further, the Federal Reserve is ready to backstop residual risk in the asset pool through a non-recourse loan, if needed. Additionally, the Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program, or TARP.

The bank said it has been provided expanded access to both the Federal Reserve's Primary Dealer Credit Facility and the discount window, resulting in strong additional liquidity resources if necessary. The bank will also have access to the yet-unused Federal Reserve's Commercial Paper Funding Facility and intends to issue debt under the FDIC's Temporary Liquidity Guarantee Program.

In return, the bank will issue an incremental $7 billion in preferred stock to the Treasury and the FDIC, with an 8% dividend to the Treasury. The bank will also issue warrants to the Treasury and the FDIC for approximately 254 million shares of the company's common stock at a strike price of $10.61.

Further, Citigroup will enhance its executive compensation restrictions and implement the FDIC's mortgage modification program. Under the agreement, an executive compensation plan, including bonuses with appropriate limitations, must be submitted to, and approved by, the government.

The company also said it has agreed not to pay a quarterly common stock dividend exceeding $0.01 per share for three years with effect from the next quarterly common stock dividend payment.

The banks' Tier 1 capital ratio for the third quarter ended September 30, on a pro forma basis, for the October TARP capital injection and the new capital generated by today's announcement, is expected to be about 14.8%, subject to approval by the Federal Reserve Board.

Commenting on the program, Vikram Pandit said, "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."

"We will continue to focus on opportunities and alternatives to further enhance the company's overall position and value," Pandit added.

The government entities said they will continue to use all of their resources to preserve the strength of the country's banking institutions and promote the process of repair and recovery and to manage risks. The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth, they noted.

The organizations also said that they will work to support a healthy resumption of credit flows to households and businesses, while exercising a prudent stewardship of taxpayer resources. They also intend to carefully circumscribe the involvement of government in the financial sector, bolstering financial institutions' efforts to attract private capital.

Citigroup's failure to acquire Wachovia Corp. (WB) made it most vulnerable as the acquisition would have provided the bank with additional deposits to bolster its capital position. Later, Wells Fargo & Co. (WFC) acquired Wachovia. Also, the slump in the commercial real-estate market, the Treasury's decision to not to buy bad assets directly from banks, and the bank's recent move to buy $17 billion of assets from a subsidiary have hammered the company's shares.

There were reports last week that the bank is exploring the possibility of selling parts of the company, including the Smith Barney retail brokerage, or an outright sale following the plunge in its stock price. Smith Barney, Citigroup's global credit-card division and the transaction-services unit, is one of its fast-growing businesses.

Meanwhile, Saudi Arabian investor Prince Alwaleed bin Talal bin Abdulaziz Al Saud is reportedly planning to increase his holdings in Citigroup back to 5% from his current stake of less than 4%. An increased stake by the prince was seen as a sign of confidence on Citigroup and Pandit.

Since December 2007, Citigroup has raised about $75 billion by selling assets and equity stakes, and received a capital infusion of $25 billion from the Treasury.

Further, in a bid to bring costs under tight lid, the company intends to cut about 52,000 jobs and reduce expenses by 20% from their peak. These massive reductions are in addition to the 23,000 jobs eliminated by the company during the first nine months of 2008. At the end of the third quarter, the company had about 352,000 employees worldwide. There have also been speculations that Citigroup's top executives would go without bonuses this year.

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