The US government made a drama-tic intervention yesterday to salvage Citigroup, once the world's largest bank, by pledging to invest $20bn (£13bn) and to guarantee against losses from toxic assets at the group worth a staggering $306bn.
Markets around the world surged higher after the US government, along with the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), announced early yesterday that they had agreed to step in with a rescue package for Citigroup after a weekend of intense negotiations
In New York, the S&P 500 gained 6.5 per cent and the Dow Jones 4.9 per cent. In Europe the FTSE 100 closed up a record 9.8 per cent and the FTSE Eurofirst 300 of top European shares bounced 8.9 per cent.
The US official agencies announced in a joint statement that: "The US government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the US government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital."
The latest move comes after a week in which the group suffered a severe drop in its share price, falling 60 per cent to close on Friday at $3.77. A year ago the shares closed at $31.70.
Yesterday, there was a bounce following the news. The stock closed up 57.8 per cent.
The US Treasury and the FDIC said the plan would "provide protection against the possibility of unusually large losses on an asset pool of approximately $306bn of loans and securities backed by residential and commercial real estate and other such assets." Citigroup will cover the first $29bn of pre-tax losses from the toxic assets, with the government covering 90 per cent of the losses after that.
In addition it will invest $20bn from the Troubled Asset Relief Program (TARP), and in exchange for that and the guarantees will receive $27bn of preferred stock with an 8 per cent dividend for the Treasury. The statement added: "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 bail-out means that Citigroup executives, including chief executive Vikram Pandit, will have to have their compensation packages, including bonuses, approved by the US government. The government has not called for anyone to be ousted from the board.
Citigroup must also implement measures to help distressed home owners, according to the government.
Mr Pandit, who has been slashing jobs across the firm in a bid to streamline its operations, said: "This weekend, the US government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi's stock price.
"We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity. We appreciate the tremendous effort by the government to assure market stability," he added. Citigroup's board of directors unanimously backed the measure.
Morgan Stanley analyst Betsy Graseck said: "The US Government's creative ring-fencing of Citigroup's $306bn in troubled assets is a strong positive for the system and for Citi shareholders. The US Government is lowering risk while not significantly diluting shareholders, keeping them engaged in the sector."
Citigroup has been badly hit by the economic downturn, shutting down divisions and slashing jobs. The latest government bailout comes after it received a $25bn injection last month under the TARP, the US's financial bail-out scheme.
Mr Pandit announced last week that it would axe 52,000 jobs by the second half of next year, on top of the 23,000 already gone in 2008. The group had 352,000 employees at the end of April. The beleaguered chief executive, who only took over in December, has faced calls to break up the business, but has so far refused to budge from the group's "universal banking" model.Reuse content