Federal Reserve Bails Out Ailing Citigroup

The U.S. Treasury Department, Federal Reserve and the Federal Deposit Insurance Corp. have entered an agreement to bail out troubled Citigroup Inc. (C) with “a package of guarantees, liquidity access, and capital,” according to a joint statement late Sunday. “The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth,” the statement read. The Treasury and the FDIC plan to provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed in part by residential real estate, which will remain on Citigroup’s balance sheet. In return, Citigroup will issue preferred shares to the Treasury and FDIC. The Fed said it stands ready to backstop residual risk in the asset pool through a non-recourse loan. According to the joint statement by the government agencies, the Treasury, Fed and FDIC will work together to “support a healthy resumption of credit flows to households and businesses,” “exercise prudent stewardship of taxpayer resources,” “circumscribe the involvement of government in the financial sector,” and “bolster the efforts of financial institutions to attract private capital.” In addition, the Treasury said it will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8 percent dividend. Citigroup said in a separate statement Monday that it will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program. “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,” said CEO Vikram Pandit. “We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity. We appreciate the tremendous effort by the government to assure market stability.” Citi said it will issue an incremental $7 billion in preferred stock to the Treasury and the FDIC as payment for the guarantee on $306 billion of securities. Citi also said it plans to 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. Citi said it has agreed not to pay a quarterly common stock dividend exceeding $0.01 per share for three years effective on the next quarterly common stock dividend payment. The announcement came after a week of struggles for Citi; it first announced massive layoffs at the bank and then it announced it would acquire the remaining assets of its Structured Investment Vehicles (SIVs) at a value of $17.4 billion, net of cash. Its stocks lost half their value in just four days, fueling speculation the company would soon be sold in pieces or in a whole transaction. Write to Diana Golobay at diana.golobay@housingwire.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.