Citigroup Inc, facing the threat of a break-up or sale, received $306 billion of US government guarantees for troubled mortgages and toxic assets to stabilise the bank after its stock fell 60 per cent last week.
Citigroup also will get a $20 billion cash injection from the Treasury Department, adding to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 per cent dividend. Citigroup rose as much as 41 per cent in German trading today.
The Treasury, Federal Reserve and Federal Deposit Insurance Corp (FDIC) said in a joint statement that the move aims to bolster financial-market stability and help restore economic growth. The decision came after New York-based Citigroup’s tumbling share price sparked concern that depositors might pull their money and destabilise the company, which has $2 trillion of assets and operations in more than 100 countries.
“Today’s announcement brings even greater clarity to our overall financial strength and ability to deliver the best service to our clients. We hope it puts to rest the unfounded rumours on our financial position and brings the focus back to the fundamentals of our global franchise,” said Sanjay Nayar, CEO (South Asia), Citigroup.
“It really was a must-do thing,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $85 billion. “If they had let Citigroup go, that would have been disastrous.”
Citigroup’s stock plunged 83 per cent this year and dropped below $5 last week for the first time since 1995. The shares were up $1.26 at $5.03 in Germany in recent trading.
Citigroup shareholders will be diluted in the “near term by the cost of the incremental preferred stock,” Morgan Stanley analysts Betsy Graseck and Cheryl Pate wrote in a report today. Over the longer term, Citigroup will appreciate because of “the reduction in tail risk” from the troubled assets, they said.
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“There will surely be ongoing chatter about a break-up of Citi once the dust settles,” analysts at Royal Bank of Scotland Group Plc, led by Tom Jenkins, said. “For now though, and indeed for the foreseeable future, Citi has oxygen.”
Former Chairman Sanford “Sandy” Weill built Citigroup through more than 100 acquisitions during his 17 years at the helm. The company, which two years ago was the biggest by market value, has slipped to number 5 after racking up four straight quarterly losses totalling $20 billion amid the worst financial crisis since the Great Depression.
Citigroup shares declined at an annual rate of more than 5 per cent, including reinvested dividends, since Weill formed the company in 1998 through the merger of Citicorp and Travelers Group Inc.
| GLOBAL MARKETS | |
| ASIA UNMOVED | % Chg* |
| Shanghai Composite | -3.67 |
| Kospi | -3.35 |
| Hang Seng | -1.59 |
| Sensex | -0.14 |
| EUROPE APPROVES | |
| FTSE 100 | 9.84 |
| CAC 40 | 10.09 |
| DAX | 10.34 |
| US CHEERS # | |
| Dow Jones | 3.09 |
| Nasdaq 100 | 3.82 |
| * over previous close # at 12:20 am (IST) ^ Japan market was closed | |
The government’s preferred shares come with warrants to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment, according to a term sheet that accompanied the agencies’ statement. Citigroup is required to pay a quarterly dividend of no more than 1 cent a share for the next three years, down from 16 cents in the most recent quarter.
“With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers,” the agencies said.
Citigroup Chief Executive Officer Vikram S Pandit said the agreement addresses “market confidence and the recent decline in Citi’s stock,” and also strengthens the bank’s “capital ratios”. The company said its so-called tier-1 capital ratio exceeds 9 per cent with the support from the government.
Terms of the asset guarantees mean Citigroup will cover the first $29 billion of pretax losses from the $306-billion pool, in addition to any reserves it already has set aside. After that, the government covers 90 per cent of the losses, with Citigroup covering the rest from assets, including residential and commercial mortgages, leveraged loans and so-called structured investment vehicles.
Unlike the bailouts of insurer American International Group Inc and mortgage companies Fannie Mae and Freddie Mac, no management changes were required and Pandit gets to keep his job, government officials said. The government will have a say over executive compensation at Citigroup.
Pandit, a former Morgan Stanley banker, joined Citigroup last year as head of hedge funds and private equity, and he was picked in December to succeed Charles O “Chuck” Prince after the bank’s expansion in sub-prime mortgages and asset-backed lending backfired.
Pandit announced a plan last week to eliminate 52,000 jobs and cut costs by about $2 billion per quarter. He and three top deputies bought 1.3 million shares in a show of confidence, and Prince Alwaleed bin Talal, one of the bank’s biggest investors, said he would boost his stake to about 5 per cent from 4 per cent.
Citigroup also issued a statement last week saying the company had “a very strong capital and liquidity position and a unique global franchise,” and Pandit held two conference calls with employees to reassure them.
| WAKE-UP CALL |
| What the bailout offers |
| * The US Treasury will invest $20 billion in Citi preferred stock under the Troubled Asset Relief Program (TARP) |
| * Citi will issue an incremental $7 billion in preferred stock to the US Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets |
| * As a result of the guarantee, the $306 billion portfolio will have a new risk weighting of 20%, thus freeing up an additional $16 billion of capital to the company |
| * Citi will issue warrants to the US Treasury and the FDIC for approximately 254 million shares of common stock at a strike price of $10.61 |
| * Citi has agreed not to pay a quarterly common stock dividend exceeding $0.01 (one cent) per share for three years effective on the next quarterly common stock dividend payment |
| How Citi’s capital is strengthened |
| * $20 billion from the TARP investment |
| * $3.5 billion, the portion of the $7 billion of preferred stock fee recognised for capital purposes |
| * $16 billion of capital benefits resulting from the asset guarantee |
The stock kept plunging, forcing the bank’s board to hold an emergency meeting on November 21 and thrusting executives into a weekend of discussions with the Fed and Treasury. The slump was reminiscent of what happened to Bear Stearns Cos in March before it was sold to JPMorgan Chase & Co and to Lehman Brothers Holdings Inc before it went bankrupt in September.
The added capital and the asset guarantees are intended to provide confidence to investors that Citigroup has a big-enough loss cushion to absorb bad loans as unemployment climbs and the economy sours.
Citigroup remains vulnerable to losses on loans and securities outside the US, said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees $8 billion and holds Citigroup shares.
The government plan “gives them a little bit of breathing room, but in the longer term things may deteriorate and losses increase,” said Kovalski. “The Achilles heel with Citi is their exposure to emerging markets and what is going to happen when emerging markets turn down, as they are doing now.”