Federal regulators were nearing finalising a plan to remove billions of dollars of toxic assets from the balance sheet of crisis-ridden banking giant Citigroup, which suffered heavy losses on mortgage-related investments, media reports said today.
Under the plan, the Citi will absorb losses to an extent after which the bad debts will be absorbed by the government.
If the government should have to take on the bigger losses, it would receive a stake in Citigroup, the New York Times said, noting the banking giant has been brought to its knees by gaping losses on mortgage-related investments.
The talks, the Wall Street Journal said, centered on the creation of what is sometimes called a "bad bank" -- an outside entity designed to hold some of a financial firm's worst assets.
That structure would help Citigroup cleanse itself of billions of dollars in potentially toxic assets and the new entity is expected to hold about USD 50 billion of assets, it quoted people familiar with talks as saying.
Taxpayers could be on the hook if Citi's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour, the paper said.
Behind the push, says the Journal, is a broad effort to shore up faith in Citigroup, which saw its stock price fall 60 per cent last week to a 16-year low.
Once the world's most valued bank, headed by NRI banker Vikram Pandit whose own job is reportedly under attack, Citigroup had over 3,75,000 employees at the end of last year and it aims to trim it down to below three lakh as part of efforts to cut costs and help the crisis-ridden bank return to normalcy.
It was unclear last night whether the government would take an equity stake in Citigroup in return for the support, and it was also uncertain whether the company would get a government loan to finance the facility, the Journal said.
The government had taken the same approach with insurer American International Group Inc in late September.
If approved, the Times said, the plan could serve as a model for other banks, heralding another shift in the government's morphing financial rescue.
The Treasury Department initially proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions.
The plan for Citigroup was still under discussion, and it was unclear exactly how the arrangement might work.
One question, the paper said, is how Citigroup and the government would determine the level of losses that the bank itself must bear before the government steps in.
Another is whether any additional government money for Citigroup, which has already received $25 billion under the initial rescue plan, would come from the $700 billion industry bailout that Congress approved in October or from other sources, like the Federal Reserve or Federal Deposit Insurance Corporation.
Regulators were debating various terms of arrangement, including whether the government would receive preferred stock or warrants, which are instruments that give holders the right to buy stock.
While preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares, warrants would be more attractive to Citigroup's existing shareholders, since they would not immediately dilute the value of their investments as much as preferred stock.
In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren't reflected there, the paper said, adding that some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books.
Even as they assured employees and investors last week that the company was on sound financial footing, Citigroup executives and directors knew they needed to do something fast to stabilise their reeling company.
Top government officials, including the heads of the Treasury Department and Federal Reserve, also have been scrambling to draw up contingency plans in case Citigroup's trouble intensified, the Journal said.
