Citigroup gets $20bn bailout + $306bn of trash assets guaranteed

Finally the US government rescues Citigroup by entering an agreement to backstop up to $306bn in trouble assets. The Treasury will inject $20 billion cash to Citigroup under the Troubled Asset Relief Program, adding to the $25 billion that was already received by the bank on the last week after its shares plunged by about 60%, amid worries the bank would lack significantly capital to survive.

Citigroup agreed to absorb the first $29 billion of losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. And the bank also shares its losses with:

1. The Treasury Department could end up absorbing $5 billion of losses
   
   
2. The Federal Deposit Insurance Corp $10 billion
   
   
3. And the Federal Reserve the rest.

In return for the cash and guarantees, the government will receive $27 billion of preferred shares paying an 8 percent dividend. Of the combined amount, $7 billion constitutes a fee for the government. The 27 billion of warrants consist of $24 billion of preferred shares for the Treasury Department and $3 billion for FDIC.

Via FT.com:

Citigroup’s new issuance of $27bn in preferred stock and its dramatic reduction in dividend payments will leave the bank with substantial excess capital.

Officials and market participants hope that excess capital can be put to work buying securities in the secondary market. The secondary market has almost totally frozen up since the Treasury’s announcement that it would not buy distressed mortgage securities through the Troubled Asset Relief Program (Tarp).

If banks begin to use such excess capital to buy these troubled assets in size in the secondary market – at levels that many believe are artificially depressed – and create a floor for prices, that in turn could break the logjam and kickstart lending in the primary market.

Related Posts :

Citigroup is near agreement on government bailout

Sources :

1. FT.com: Citigroup gets $20bn bail-out, November 24 2008 08:32
2. MoneyWeb: Citigroup gets $306bn lifeline, November 24, 2008 09:33
3. Telegraph: US stock futures gain on Citigroup rescue, November 24, 2008 8:28AM GMT
4. Bloomberg: Citigroup Gets Guarantees on $306 Billion of Assets (Update3), November 24, 2008 05:57 EST

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