Finance Globe

U.S. financial and economic topics from several finance writers.
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Taxpayers Rescue Citigroup

Citigroup has become the next major institution troubled by bad mortgage-related investments to receive a taxpayer bailout.

The New York-based mega-bank is yet another financial giant to be considered "too big to fail"; the company has its hand in so many deals around the world that its failure would be catastrophic to the global economy, according to experts.

A joint announcement was made on Sunday by the U.S. Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) on Sunday outlining the Citigroup rescue plan.

Citigroup will continue to keep their $306 billion of possibly risky mortgage-backed and mortgage-related securities on their books but the assets will be appropriately "ring-fenced", according to the plan details.

The government rescue agreement is actually an insurance plan that serves to protect the institution from an unexpectedly large number of losses related to those mortgage investments, and protect Citigroup against losses from commercial real estate loans for five years and residential real estate loans for ten years.

Having already received $25 billion of Troubled Assets Relief Fund (TARP) money so far, Citigroup will issue preferred stock to the government for another $20 billion of much-needed capital. As payment for the government's insurance, Citigroup will issue an additional $7 billion in preferred stock to the government, paying dividends of 8% per year. $4 billion of the preferred stock will go to the Treasury and $3 billion will go to the FDIC.

Under the new rescue plan, Citigroup will absorb all mortgage-related losses for the first $29 billion (in addition to their existing reserves). After that point, the government will pay 90% of the losses and Citibank will absorb 10% - the Treasury will pay up to $5 billion with TARP funds, and then the FDIC will pay up to $10 billion. If those fund limits are reached, the Federal Reserve will step in to provide Citigroup with a loan (secured by collateral), still keeping to the 10% deductible.

The deal requires that Citigroup's "executive compensation plan, including bonuses, that rewards long-term performance and profitability, with appropriate limitations, must be submitted to, and approved by, the U.S. Government."

Also, quarterly dividends on common stock have been slashed from $.16 a share to a penny a share. This dividend restriction on Citigroup's common stock will be in place for the next three years, unless it is first approved by the Treasury, the Fed, and the FDIC. "A factor taken into account for consideration of the U.S. Government’s consent is the ability to complete a common stock offering of appropriate size."

Troubled homeowners are also addressed in the Citigroup rescue - Citigroup is required to help homeowners and adopt FDIC-outlined loan modification protocol.

The Treasury, Federal Reserve, and FDIC jointly stated, "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. 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."

The government said their efforts are are guided by: working to support the flow of credit to homes and businesses, exercising "prudent stewardship of taxpayer resources", limiting government involvement in the financial sector, and bolstering financial institutions' efforts to attract private capital.

President Bush said this morning regarding the Citigroup rescue that he and Treasury Secretary Henry Paulson share the concerns of Americans regarding their jobs and savings. He said that after a long discussion with Paulson during their flight from Peru last night, Bush decided that it was necessary to help Citigroup.

"We've made these kind of decisions in the past, we made one last night and if need be, we're going to make these kind of decisions to safeguard our financial systems in the future," Bush said.

Bush said that he spoke to President-elect Barack Obama about the decision to aid Citigroup. The President also said that he will continue to communicate major decisions to Obama during the transition, and that the Bush Administration is working closely with Obama's transition team.

When asked about President Bush's mention of the possibility of more bank rescues in the future, Deputy Press Secretary replied to reporters, "We would never foreshadow any specific actions involving private firms. But I think it's safe to say that it's a very strong message from the President and from -- the joint statement from Treasury, the Fed, and the FDIC last night, that we take threats to our financial system seriously and we stand ready to take any steps necessary to prevent systemic events in our economy."

Just last week Citigroup announced that it would cut its labor force by 53,000 positions, about half of which are in the commercial sales department, in an effort to trim expenses and position itself to better weather the economic storm. Wall Street didn't take the news very well and the company's stock plummeted from an already shaky position.

Stock markets around the world rallied in response to the government's announcement of the Citigroup rescue plan. Citigroup's stock also soared Monday in light of the news, starting off the day at $6.12 a share, and then settling in for the day at $5.95 - at a nearly 58% gain from its price of $3.77 a share at the close of the market last Friday. Still, the company's share prices are down 87% this year.

U.S. Department of the Treasury
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Sunday, 17 October 2021

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