US government bails out Citi

US treasury secretary Hank Paulson tries a new approach in an effort to rescue Citi from collapse and kick-start a recovery.
Vikram Pandit and Citi's other top executives closed the biggest deal of their careers on Sunday night, finalising an agreement with the US government that guarantees up to $306 billion in assets, adds $40 billion of capital and keeps them in charge of the troubled bank.

Citi's senior bankers thrashed out the details of the rescue during weekend-long crisis talks with officials from the US Treasury, Federal Reserve and the Federal Deposit Insurance Corporation after the bank's share price collapsed by 60% last week. Under the terms of the deal, the Treasury will inject $20 billion of fresh capital under the Troubled Asset Relief Program (Tarp) and the Treasury and FDIC will provide a guarantee on up to $306 billion of real estate assets.

"This weekend, the US government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi's stock price," said Pandit, who is CEO of the bank. "We are committed to streamlining our business and providing outstanding banking services to our clients around the world."

The troubled assets will remain on Citi's balance sheet and the bank will absorb the first $29 billion of any further losses. To pay for the deal, Citi will issue $27 billion in preferred stock û $20 billion to the Treasury for the new capital and $7 billion as a fee to the guarantors. The preferred shares offer an 8% dividend.

In a departure from the approach to rescuing American International Group (AIG) in September, Citi's management will be allowed to keep their jobs in return for agreeing a compensation plan that rewards "long-term performance and profitability".

Citi has also agreed to pay quarterly dividends of no more than a penny a share for the next three years û unless the government approves an increase.

In addition to the new capital it provides, the deal also releases an extra $16 billion in capital through the guarantee, which reduces the amount of cash Citi has to set aside against the portfolio of real estate assets. A further $3.5 billion of the guarantee fee will be recognised for capital purposes, which means that, in effect, Citi has gained close to $40 billion of capital.

That new capital cushion should help to stop the panic that brought Citi to its knees last week û the stock was up 40% in German trading on Monday and added 57% in US trading û but only time will tell if it can address investors' underlying fears.

Citi's operations in emerging markets around the world appear vulnerable to the continued global slowdown, but Citi insiders say the bank's Asian business is the least of its worries. Year-to-date revenues at the end of the third quarter were $13.7 billion, up 4% on last year. Those results were driven by global transaction services, which posted a net income gain of 39% at the end of the third quarter.
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