The Federal government moved late last night to stabilize Citigroup by injecting billions of dollars into the beleagered firm. Citi has seen its stock price fall by over 60 percent, ending at $3.77 last week. It has billions of dollars in morgtage backed securities on its books that are at the center of the bank’s problems. It is also a financial giant, with over two trillion in assets on its books. From the Washington Post:
The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. announced just before midnight Monday that they will protect Citigroup, one of the nation’s largest banks, against potential losses on a $306 billion pool of troubled assets. Citigroup would absorb the first $29 billion in any further losses on these assets, which are primarily securities backed by mortgages and commercial real estate loans, with the government stepping in to cover most of the losses beyond that amount. The distressed assets would be fenced off by Citigroup from the rest of its holdings, allowing the firm to insulate itself from the fallout.
The government in return is to receive up to $7 billion in preferred shares.
The Treasury also will invest another $20 billion in Citigroup on top of the $25 billion of taxpayer dollars already invested in the bank this fall. In exchange, the government will get even more preferred shares, paying an 8 percent return.
As a condition of the emergency assistance, the company will have to adhere to new restrictions on what it pays its executives and carry out an FDIC program to help homeowners avoid foreclosure, according to a statement by the three government agencies involved. The terms of the new cash injection are also less favorable for the company’s shareholders than those of the initial infusion by limiting stock dividends to a penny per share in each quarter over the next three years.
The Sunday New York Times did an expansive story on how Citi came to be in the bad spot they are in today, and it is nothing short of an outrage, with the risk managers looking the other way as the bank piled up these mortgage backed securities and padded executive bonuses with the higher rate of return those securities offered. Now the government must step in. Another shock to the financial system. Federal Reserve of New York Chairman and incoming Treasury Secretary Timothy Geithner was involved in the negotiations that led to this government action.