U.S. Rescues Citi with $20 Billion Capital - Spreading the Exposure
(
Page 2 of 3 )
SPREADING THE EXPOSURE
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.
Government 
