Federal regulators late Sunday agreed to backstop about $306 billion of Citicorp's riskiest assets to bolster the staggering banking giant, in yet another in a growing list of radical efforts to shore up confidence in troubled financial markets.
Under the agreement announced by the Treasury Department, the FDIC and the Federal Reserve, the government will protect Citi securities backed by residential and commercial real estate. The assets will remain on Citigroup's c balance sheet. As a fee for the government protection, Citi will issue $7 billion in preferred stock to the Treasury and FDIC.
In addition, the Treasury Department will inject another $20 billion into Citigroup, in exchange for preferred stock, with the money coming from the recently approved $700 billion Troubled Asset Relief Program. The government has previously invested $25 billion into Citigroup under the program.
The federal guarantees will be in place for 10 years for residential assets, and five years for the other securities. To further protect taxpayers, Citigroup will absorb all losses in the portfolio up to $29 billion, in addition to existing reserves it is required to hold against the pool of assets. Losses beyond that amount will first be shared by the Treasury and the FDIC, with the Fed backing the remaining large pool of assets, officials said.
The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief, also participated.
Vikram Pandit, Citi's chief executive officer, welcomed the action. "We appreciate the tremendous effort by the government to assure market stability," he said in a statement issued early Monday.
Citigroup is such a large, interconnected player in the global financial system that it is seen by Washington policymakers as too big to fail. The company has operations around the globe in more than 100 countries.
As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent per share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout the previous quarter. The agreement also puts restrictions on executive compensation, including bonuses.
Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners.
Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.
Under the IndyMac plan, struggling home borrowers pay reduced interest rates for five years. Rates are reduced so borrowers aren't paying more than 38% of their pretax income on housing.
The IndyMac plan also was used as a model for a new program by mortgage finance companies Fannie Mae and Freddie Mac and for two other failed thrifts taken over by the government on Friday. FDIC Chairman Sheila Bair has been pressing Treasury to use $24 billion from the $700 billion bailout program to put the mortgage modification program on national footing, but Paulson is opposed to that idea.