U.S. Rescues Citi with $20 Billion CapitalBy Reuters - | Posted 2008-11-24 Email 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.
NEW YORK (Reuters) - The U.S. government has bailed out Citigroup Inc, agreeing to shoulder most of the potential losses on $306 billion of high risk assets and inject $20 billion of new capital, in its biggest rescue of a bank yet.
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 Cos, Lehman Brothers Holdings Inc and Washington Mutual Inc.
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.
Citigroup received the latest infusion after its shares plunged 60 percent last week to $3.77, amid worry it lacked enough capital to survive. The bank estimated $40 billion of capital benefits, partially from the government guarantee.
In return for the bailout, Citigroup's dividend will be essentially wiped out. The bank cannot pay out more than 1 cent per share per quarter over the next three years without government consent. The quarterly dividend is now 16 cents.
"It looks enormous in size and scope," said Tony Morriss, senior currency strategist at ANZ Bank in Sydney. "Does this mean support for other financial institutions will be this big? Does this mean there will be more problems around calculation of so-called toxic assets?"
Citigroup has the farthest international reach of any U.S. bank, with operations in more than 100 countries. The bank was widely perceived to be too big to be allowed to fail, because any collapse could cause financial havoc around the globe.
"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview.
The New York-based bank will try to modify troubled mortgages in the $306 billion portfolio as the government tries to keep homeowners out of foreclosure.
Chief Executive Vikram Pandit and other top management will keep their jobs despite the intervention, but the government will have the final say on executive pay packages. More details on compensation may come next week, government officials said.
Not all investors were pleased. "You're seeing an inept management team being rewarded by the U.S. government," said William Smith, chief executive of Smith Asset Management in New York, which owns Citigroup stock.