U.S. government regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could
soak up tens of billions of dollars in losses at the struggling bank, the government announced late Sunday night.
The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about
$20 billion in the company. The plan, emerging after a harrowing week in the financial markets, is the government's third
effort in three months to contain the deepening economic crisis and may set the precedent for other multibillion-dollar financial
Citigroup executives presented a plan to U.S. government officials on Friday evening after a weeklong plunge in the company's
share price threatened to engulf other big banks. In tense, round-the-clock negotiations that stretched until almost midnight
on Sunday, it became clear that the crisis of confidence had to be defused now or the financial markets could plunge further.
Whether this latest rescue plan will help calm the markets is uncertain, given the stress in the financial system caused
by losses at Citigroup and other banks. Each previous government effort initially seemed to reassure investors, leading to
optimism that the banking system had steadied. But those hopes faded as the economic outlook worsened, raising worries that
more bank loans were turning sour.
President-elect Barack Obama was also working over the weekend to shore up confidence in the rapidly faltering economy.
Obama signaled that he would pursue a far more ambitious plan of spending and tax cuts than he had outlined during his campaign
and planned to announce his economic team on Monday. Some Democrats in Congress, meantime, were calling for the government
to spend as much as $700 billion to stimulate the economy over the next two years.
Obama's expected choice for Treasury secretary, Timothy Geithner, the president of the Federal Reserve Bank of New York,
played a crucial role in the negotiations on Friday but worked behind the scenes once news of his appointment was circulated.
While the initial focus of government officials was to help the embattled company, they may also seek to draw up an industrywide
plan that could help other banks.
Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels.
The plan could herald another shift in the government's financial rescue. The Treasury Department first proposed buying
troubled assets from banks but then reversed course and began injecting capital directly into financial institutions. Neither
plan, however, restored investors' confidence for long.
"By intervening, they are giving the market some heart to temporarily stave off some fear but you can only push
that so much," said Charles Geisst, a financial historian and professor at Manhattan College.
Banking industry officials said the decision to support Citigroup, while necessary, could draw a firestorm of criticism
from smaller institutions that were not big enough to be saved.
Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate
loans and certain other assets, which will remain on the bank's balance sheet. Citigroup will shoulder losses on the first
$29 billion of that portfolio.
Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government
absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary,
the Federal Deposit Insurance Corp. will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee
any additional losses.
In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is
buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly
erode the value of shares held by investors.
Citigroup will also agree to certain executive compensation restrictions, which will be reviewed by regulators. It will
also put in place the FDIC's loan modification plan, which is similar to one it recently announced.
The government said it was taking the step to bolster the economy while protecting taxpayers. "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 regulators said in a joint statement Sunday.
Inside Citigroup's Park Avenue headquarters, the mood was tense. Through the weekend, Robert Rubin, the former Treasury
secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry Paulson
Vikram Pandit, Citigroup's chief executive, spoke to regulators and lawmakers. Pandit also met with Citigroup's board on
Saturday, and there was no indication that they would seek to replace him.
Once the nation's largest and mightiest financial company, Citigroup lost half its value in the stock market last week
as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that
its finances are deteriorating. Citigroup has suffered staggering losses for a year now, and few analysts think the pain is
over. Many investors worry that it needs more capital.
With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected
that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street,
as too big to be allowed to fail.
Citigroup executives reached out to the Federal Reserve and the Treasury last week as they sought to stabilize the company's
stock. All major bank stocks have been battered in recent weeks, including those of Bank of America, Goldman Sachs, JPMorgan
Chase and Morgan Stanley.
Citigroup's shares have been hit particularly hard. A year ago they were trading at about $30; on Friday they closed at
The plan under discussion is reminiscent of the one that Citigroup and the FDIC worked out in October with Citigroup's
proposal to buy Wachovia. That deal fell through, however, when Wells Fargo swept in with a higher offer.
Under that plan, Citigroup agreed to bear a certain level of Wachovia's losses, with the U.S. government agency absorbing
the rest. In exchange, Citigroup agreed to give the FDIC preferred stock.
It is also similar to an effort orchestrated by Swiss financial regulators for UBS, another big global bank. Last month,
the Swiss central bank and UBS reached an agreement to transfer as much as $60 billion of troubled securities and other assets
from UBS's balance sheet to a separate entity.