'Repair and Recovery': U.S. Bold Plan to Rescue Citigroup

Three gov't agencies join together for a multibillion-dollar plan to save Citi.

November 21, 2008, 7:00 PM

Nov. 24, 2008— -- The federal government and Citigroup announced an extensive plan late Sunday night to rescue the struggling financial giant with $306 billion in loan and securities guarantees and a new $20 billion stake in the troubled firm.

In exchange for the government's backing, Citigroup will provide the government an additional $7 billion in preferred stock, will abide by "enhanced" restrictions on executive compensation and will implement the Federal Deposit Insurance Corporation's mortgage modification program.

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The action, announced just before midnight Sunday by the Treasury Department, the FDIC and the Federal Reserve Board, is aimed at restoring confidence in a mammoth firm whose downfall would devastate the already crippled financial system and the American economy.

"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," the three agencies said in a statement issued late Sunday night. "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 rescue plan was announced after marathon weekend negotiations 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 Obama as his Treasury chief, also participated.

The bank, which has at least $2 trillion in assets, has been widely regarded as "too big to fail."

The company boasts more than 300,000 employees and 200 million customer accounts through more than a dozen brands. The nearly 200-year history of the company's purchases and mergers includes literally hundreds of businesses that eventually bowed below the Citi umbrella. (Citi last month tried to add another business to its roster -- Wachovia bank -- but Wells Fargo acquired the firm instead.)

"The ramifications," said William Fitzpatrick, an equity analyst at Optique Capital Management in Milwaukee, "would be too far-fetched and too damaging for our financial system for an organization of their size to fail."

Citi's size hasn't insulated it from the financial crisis. In fact, many argue that it made Citi's troubles worse.

Is Citi Too Big?

Alois Pirker, a senior analyst at Aite Group, a Boston-based research and advisory firm, said that Citi has had difficulty integrating its many moving parts.

"I think the company has been too big for a long time -- too many people over all, too many business to be in," Pirker said. "In good times, you can carry on that structure and you're going to be fine. In times like these, it becomes a life-threatening position to be in."

That life-threatening position was exacerbated by the fact that Citi, analysts say, was at the forefront in the creation of complicated investments that ultimately brought on the financial crisis.

"If there was an exotic instrument created in the last five years, Citigroup was at the table," Fitzpatrick said.

As a result, in recent months, the firm that has prided itself in "universal banking" has seen its universe shrink dramatically.

There have been more than 70,000 layoffs, the sale of several Citi subsidiaries and, last week, the plunge of Citi's stock to a 13-year low.

Still, as late as last week, Citigroup continued to tout its financial health and put a positive spin on the layoffs and the sales of its businesses, which thus far have included the commercial finance company CitiCapital, the employee benefits company CitiStreet, the Upromise credit card business and an outsourcing business in India.

"Citi has a very strong capital and liquidity position and a uniqueglobal franchise," the company said in an e-mailed statement. "We are focused on executing our strategy, including our targeted expense and legacy asset reductions, and we believe the benefits will be seen over time."

"They seem to continue repeating, 'Our business model is fine, our business model is fine. We're a universal bank, we can be everything to everybody,'" Pirker said last week. "The market doesn't believe that anymore."

Despite the market's gloomy outlook on Citi -- the firm's share price was below $4 Friday -- there was far from consensus that the company was destined for demise.

Citi Stock and Investors

One of Citi's biggest investors, Prince Alwaleed bin Talal of Saudia Arabia, recently announced he was increasing his stake in the firm, saying he believed the bank's stock was "dramatically undervalued," while a leading analyst has defended the firm's health.

"I have received numerous calls today asking me if Citigroup is about to fail. I see no reason why this should happen," Richard Bove, an analyst at the research firm Ladenburg Thalmann, wrote last week.

While Citi has seen its balance sheet battered by investments in mortgage-backed securities and other risky assets, Bove argued that Citi can cover its losses. Among other factors, the firm has already paid down more than $130 billion in debt; has $780 billion in bank deposits, most of them overseas; and has access to a lending program run by the Federal Reserve, Bove noted.

The only thing that could topple the firm, he said, would be "a Depression every bit as large and long as the 1930s debacle."

Others disagree.

Fitzpatrick said that anticipated -- not current -- hits to Citi's portfolio are driving serious doubts about whether the bank can avoid insolvency.

"There's a legitimate fear that there are additional losses on the balance sheet, and I think that's really what's weighing on the stock price now. You're going to have more losses and the company's going to have an inability to raise capital going forward," he said.

While the government has been willing to invest in Citi -- first, through $25 billion from the government's $700 billion financial rescue plan and now an additional $20 billion, also from the rescue plan -- Fitzpatrick said that it will be hard to find other investors.

And Citi's share price, he said, doesn't help.

"You can't raise capital with a $4 stock price," he said.

In addition to the several sales it's completed this year, Citi has said that it's selling its German retail banking business. But some say Citi will have to sell more than that to recover from its woes.

"They really need to act swiftly ... and shrink the company to a level that's manageable again," Pirker said.

The Associated Press contributed to this report.

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