Citigroup Rescued?U.S. Government

November 24, 2008

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The US Treasury is set to invest $20bn (£13.4bn) in return for preferred shares in Citigroup.

The Treasury and the Federal Deposit Insurance Corp will also guarantee up to $306bn (£205bn) of risky loans and securities on Citigroup’s books.

The plan follows a $25bn injection of public funds in the bank last month.

Citigroup’s market value fell to $20.5bn on Friday, compared with $270bn in 2006.

Last week the company announced 52,000 job losses worldwide, on top of 23,000 job cuts previously announced. It employs around 12,000 people in the UK.

Citigroup has lost more than $20bn in the past year because of the global financial crisis, suffering four straight quarterly losses.

Citibank UK deposit holders are covered by the Financial Services Authority. The Financial Services Compensation Scheme guarantees up to £50,000 per Citibank account holder, should the bank go bust.

‘Protecting taxpayers’

The action plan was announced after emergency talks over the weekend between the bank and the treasury department, the Federal Reserve and the Federal Deposit Insurance Corp.

Citigroup is one of the leading US banks and has operations in more than 100 countries.

Many analysts had calculated that the huge financial institution was too big to allow to fail.

“With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,” the three agencies said in a statement.

“We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks,” they added.

The cash injection will come from the $700bn financial bail-out fund created last month.

Focus on details

Many analysts believe the plan to rescue Citigroup will help reduce uncertainty in the market.

“We expect the US bail-out of Citigroup as well as Obama’s promise of a major stimulus plan – with key Democrats suggesting numbers between $500bn and $700bn, much bigger than expected – to allow stock markets to gain across the globe, ” said Dariusz Kowalczyk at CFC Seymour in Hong Kong.

Markets are keenly awaiting for more details of the plan to be revealed.

“Clearly, the market focus today will be on the release of a concrete rescue plan for the bank, details of which remain fluid; reports so far have noted that any infusion plan is provisional and subject to change,” said Sue Trinh at RBC Capital Markets 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? It’s too early to say,” said Tony Morriss at ANZ Bank in Sydney.

Management’s future

Under the agreement, Citigroup does not have to replace chief executive Vikram Pandit and other top managers, but the government will be able to make decisions on their compensation.

Mr Pandit, who took the top job at Citigroup in January, has come under fire for failing to turn around the bank.

“You’re seeing an inept management team being rewarded by the US government,” said William Smith at Smith Asset Management in New York.

The bank will not be able to pay out more than 1 cent per share quarterly dividend. The dividend now stands at 16 cent per share.

Seeking to stabilise the financial system, the US government has bailed out Bear Stearns, Fannie Mae, Freddie Mac and American International Group and injected hundreds of billions of dollars into financial institutions.

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