By William Patalon III
Money Morning/The Money Map Report
Banking giant Citigroup Inc. (C) received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets, in a rescue package that will save the embattled bank from a possible breakup or sale after its stock plunged 60% last week.
Citigroup will also receive a $20 billion cash infusion from the U.S. Treasury Department, which is in addition to the $25 billion the company received last month under the $700 billion Troubled Asset Relief Program (TARP). In return for the cash and guarantees, the federal government will get $27 billion of preferred shares that pay an 8% dividend. Citigroup shares – which closed Friday at $3.77 each, down 19.96% – jumped $2.18 a share, or 57.82%, to close at $5.95.
The Treasury, Federal Reserve and Federal Deposit Insurance Corp. (FDIC) said in a joint statement that the move aims to bolster financial-market stability and help restore economic growth, Bloomberg News. The decision came after New York-based Citigroup’s tumbling share price sparked concern that depositors might pull their money and destabilize the company, which has $2 trillion of assets and operations in more than 100 countries.
“There will surely be ongoing chatter about a breakup of Citi once the dust settles,” Tom Jenkins, an analyst at Royal Bank of Scotland Group PLC, wrote in a research report today. “For now, though, and indeed for the foreseeable future, Citi has oxygen.”
Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $85 billion, told Bloomberg that the rescue plan “really was a must-do thing. If they’d let Citigroup go, that would’ve been disastrous.”
The assets that may be “guaranteed” by the government are part of roughly $400 billion worth of auto loan, bonds, corporate loans, mortgages and other assets that Citi Chief Executive Officer Vikram S. Pandit back in May said the banking giant would dispose of within three years. Regulators and bank officials spent the weekend discussing just how much of those assets will be covered under any new plan.
“If anybody’s too big to fail from the financial system’s point of view, it’s Citi,” said Brian Barish, president of Cambiar Investments LLC in Denver, which manages about $6 billion, told Bloomberg over the weekend. “The government doesn’t need to be in this to make money. If they lose a few bucks on this, but save the system, it’ll be worth it.”
Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with low incomes or lousy credit. Foreclosures on those mortgages spiked, leaving Citi and other financial companies to choke down huge losses on the soured investments.
The company lost 60% of its market value last week as investor confidence in the New York-based company’s prospects faltered after four consecutive quarterly losses. The worry was that, without a way of arresting that slide, the market-value loss may rattle Citigroup’s customers, counterparties and employees – even threatening the operations of the second-biggest U.S. bank by assets, according to a report by David Hendler, an analyst at CreditSights Inc. in New York.
Citigroup’s stock has plunged 83% this year and dropped below $5 last week for the first time since 1995. The shares were up $1.26 at $5.03 in Germany in recent trading.
Citigroup shareholders will be diluted in the “near term by the cost of the incremental preferred stock,” Morgan Stanley (MS) analysts Betsy Graseck and Cheryl Pate wrote in a report today.
The Citi deal is merely a variation on a theme that has played out in government interventions during the past year, including the purchase by JPMorgan Chase & Co. (JPM) of The Bear Stearns Cos., Citigroup’s failed effort to buy Wachovia Corp. (WB) banking branches (but now the ho, and the Swiss government’s rescue financing of UBS AG (UBS). In each case, the government required the suitor to agree to absorb a certain level of initial losses, with the Treasury Department agreeing to guarantee deficits beyond that amount.
For instance, JPMorgan took the first $1.15 billion of losses on a $30 billion portfolio of Bear Stearns’s devalued assets, with the Fed agreeing to finance the rest. And back in the fall, Citi agreed to suffer the first $42 billion of losses on Wachovia’s loan portfolio, with the Federal Deposit Insurance Corp. (FDIC) taking the rest, in a deal that was canceled after Wells Fargo & Co. (WFC) jumped over Citi to buy all of Wachovia.
Citi’s failure to secure Wachovia has been widely attributed as having exacerbated the big bank’s decline.
The Swiss government required UBS in October to inject $4.91 billion into a special purpose vehicle (SPV) backed with $54 billion of central bank loans to allow the bank to carve off about $60 billion of assets.
News and Related Story Links:
- Bloomberg News:
Citigroup Gets Guarantees on $306 Billion of Assets.
- Bloomberg News:
Citigroup, Fed Said to Weigh Plan to Limit Losses.
- The Associated Press: .
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.