The U.S. federal government agreed on Sunday night on a massive rescue plan for banking giant Citigroup (C). The plan consists of two key features: the Treasury Department and the FDIC will backstop some losses against more than $300 billion in troubled assets based on valuation agreed upon between Citi and the U.S. government. The Treasury will make a fresh $20 billion investment in the bank, on top of $25 billion it just put into the bank following the first round of TARP purchases. In return for the cash infusion, the government gets a partial ownership stake where Citi would pay an 8% dividend rate on those shares.
Behind this massive push is a determined effort by the government to shore up faith in the New York-based bank, which saw its stock price fall 60% last week to a 16-year low, amid concerns it lacked enough capital to survive. Whether or not the unprecedented scope of the rescue plan will prove to be enough to stabilize Citigroup — is still a question that remains unanswered.
According to WSJ – Citigroup will not make any changes to its executive ranks or its board in return for government assistance. However, the bank agreed to “comply with enhanced executive compensation restrictions and implement a government-backed plan to modify distressed mortgages that is designed to curb foreclosures.”
From the Fed: Joint Statement by Treasury, Federal Reserve and the FDIC on Citigroup.
The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
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. The following principles guide our efforts:
* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.
Here is the Summary of Terms.