Spreading the Exposure

By Reuters -  |  Posted 2008-11-24 Print this article Print

Citigroup's rescue marks the latest government effort to contain a widening financial meltdown that has caused the disappearance or bankruptcies of companies including Bear Stearns, Lehman Brothers and Washington Mutual. The government's $20 billion of new capital comes on top of $25 billion it had put into the second-largest U.S. bank by assets, and it will receive preferred shares with an 8 percent dividend in return.


If it works, the package may become a template for other U.S. banks expected to face growing losses as the economy sinks into recession. Credit losses once concentrated in mortgages are already bleeding into other areas such as credit cards and commercial real estate.

The rescue further magnifies the U.S. government's burden, following bailouts of American International Group Inc, Bear, Fannie Mae and Freddie Mac, and the injection of hundreds of billions of dollars into banks and other financial institutions.

Well over $1 trillion of taxpayer money is at risk, and the Big Three automakers in Detroit are seeking billions more to avoid possible bankruptcy.

The administration of President-elect Barack Obama may also propose a $500 billion to $700 billion economic stimulus.

Asian stock markets trimmed earlier losses in Monday trading following the Citigroup announcement, while several European stock indexes rose. Dow Jones industrial average futures were down 21 points at 8,021, while Standard & Poor's 500 futures were up 2.9 points at 794.80.

Citigroup agreed to absorb the first $29 billion of losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion.

The Treasury Department could end up absorbing $5 billion of losses, the Federal Deposit Insurance Corp $10 billion, and the Federal Reserve the rest.

The Treasury Department will get $24 billion of preferred shares, and the FDIC $3 billion. Of the combined amount, $7 billion constitutes a fee for the government guarantees. The government will also get warrants to buy $2.7 billion of common stock, comprising about 254 million shares at $10.61 each.

Citigroup estimated the injection will give it a Tier-1 capital ratio of 14.8 percent, more than twice what the government requires. The bank said it will also get increased access to the Fed's discount window, adding liquidity.

The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

The government announced the package less than a week after Pandit set plans to reduce Citigroup's workforce to 300,000 by early next year from 375,000 at the end of 2007.


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