source cnn money

Citi dodges bullet

Government will guarantee losses on more than $300 billion in troubled assets and make a fresh $20 billion injection.

By David Ellis, CNNMoney.com staff writer

Last Updated: November 24, 2008: 6:55 AM ET

Citigroup secured a massive government aid package over the weekend following a painful selloff last week in company stock.

NEW YORK (CNNMoney.com) -- The U.S. government on Sunday announced a massive rescue package for Citigroup - the latest move to steady the banking giant, whose shares have plunged in the past week.

Citigroup shares rose 33% in premarket trading Monday.

The plan has two key features:

First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

In addition, the government will get warrants, or the right to purchase $2.7 billion worth Citigroup shares in the future.

The government will impose restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share for the next three years and will face limits on executive compensation.

Plus, Citigroup will be expected to adjust mortgages for troubled borrowers, using procedures similar to those the FDIC implemented at IndyMac, which it took over last summer.

"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," Treasury, Federal Reserve and the FDIC said in a joint statement.

Under the terms of the Citigroup rescue package, the bank would be on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. It would cover 10% of losses above that amount, with the government shouldering the rest.

Despite the massive rescue effort, regulators did not push for a management change at Citigroup. In recent days, there had been speculation that Citigroup CEO Vikram Pandit could step down. There had also been talk that the company was considering replacing Chairman Sir Win Bischoff, although the company denied such reports.

Citigroup has been one of the hardest hit financial firms since the mortgage market first started to unravel in the fall of 2007. Over the past four quarters, the company has recorded close to $21 billion in losses.

Investors seemed encouraged by news of the Sunday night rescue. Major European markets jumped at the open, with Citi shares climbing 35% in Frankfurt. U.S. futures were pointing to a higher open Monday.

A scary week

Federal Reserve Chairman Ben Bernanke and Timothy Geithner, president of the New York Fed, were both involved in the weekend talks over Citigroup's fate, according to government officials. Geithner is expected to be nominated to be Treasury Secretary by President-elect Barack Obama.

There had been concerns that letting another major financial institution fail would have disastrous consequences for both the U.S. economy as well as the global financial system. The bank had more than $2 trillion in assets as of the end of the third quarter and has operations in more than 100 countries.

Last week, fears about Citigroup's fate rattled equity markets around the globe and sent shares of the 196-year-old firm plummeting to levels not seen in over a decade.

Citigroup shares lost close to two-thirds of their value for the week, even as the company announced plans to layoff more than 50,000 workers and as its largest individual shareholder upped his stake.

By the close of trading on Friday, Citigroup (C, Fortune 500) shares had dipped below $4 a share, and were down 87% for the year.

The most recent slide in Citigroup stock comes on the heels of news earlier this month that the Treasury Department was abandoning its initial rescue plan to buy troubled assets from banks - Citigroup had been seen as a major beneficiary of that strategy.

Instead, as part of the $700 billion bailout package that was signed into law in early October, Treasury has focused on making direct investments in banks. In exchange for equity stakes, the agency has injected $25 billion into Citigroup and an additional $100 billion into eight other major U.S. financial institutions.

Despite the recent events, many industry experts had stressed that Citigroup is relatively healthy. Two veteran banking analysts - Mike Mayo of Deutsche Bank and Ladenburg Thalman's Richard Bove - both advised clients last week that Citigroup could survive substantial loan losses.

Where do all the money come from?

is that a lot? I mean the Polish Zloty didnt have a lot of value at some point in time.

Where the money comes from? It is virtual. And if government needs it cash, it prints the money.

The masses of America don't seem to mind. I mean the party responsible for this behavior in the first place, just picked up seats on Congress, the department responsible for our spending.

I should do that. Buy more then I can handle, and just write hot checks to pay it off. If those checks don't clear, write more to cover them.

If the US Congress can spend billions when they are broke, why can't I?

this is so f-ed up.
can't comment on this anymore. I'll curse to much

You mean the Bush Adminstration who were the ones who proposed the $700 billion bailout?

Republicans are not the fiscally conservative party that they used to be, so blaming the Democrats entirely is just plain foolish and completely ignores how the Republican Party has fundamentally changed.

I thought that the Big 3 wanted a bailout.

I agree with you on the second part.

@Mafoo

US Congress can spend all that money because it isn't theirs.

Can you show me where the Bush Administration bailed out anyone? All I see who seems to spend the money, is Congress.

Do you need a civics lesson?

The Big Three Bailout is separate. It would only be around $25 billion (although most anyone who knows what is going on know that it would end up being more than that).

I'm torn on the Big Three Bailout. If there was one, it would have to be extreme in its criteria. I mean to the point where the entire board of directors is kicked out and there have to be many tangible steps taken to show that the car companies are going to change.

But I have recently been convinced that Chapter 11 bankruptcy is a better option. This is because Chapter 11 would allow the car manufacturers to negate a lot of the current obligations they have.

Part of the car manufacturers problems is that their cost structure makes them uncompetitive. Toyota, for example, has a fraction of the number of dealerships that GM has, while both have about the same market share. This is because local car dealers have petitioned to their states to get legislation favorable to enforcing restrictive contracts where dealerships only sell certain types of cars. This has ballooned costs across the board.

Another problem is the labor contracts GM and the rest of the Big Three have. These have just gotten completely out of control, with the car companies promising pensions they could never fulfill. I am for equitable treatment of labor, but it just isn't working with GM. They are also paying more than is competitive to their laborers. I may be pretty liberal, but I do know my economics.

So all in all I am against a bailout for the Big Three, as a Chapter 11 bankruptcy filing would solve more of their problems and the taxpayers shouldn't be responsible for the car manufacturers' poor choices.

Do you just hit the snooze button when Republicans do something you don't agree with?

No one ever said that anyone but Congress passed the bailout, but the Bush Adminstration (specifically Bush and Paulson) were the ones who 1) proposed what the bailout should be and 2) pressed Congress to act immediately to adopt the bailout plan.  Hell, they were acting like it was so urgent that they ended up hurting markets by inciting fear that a bailout was necessary, which of course led to egg-in-the-face syndrome when Congress voted the bailout down the first time, which led to even more urgent pleads to Congress to pass the bailout.

They really made the situation as bad as it was by trying to hastily push through a plan that had not been thought out that well through Congress, which in turn made the markets worse, which in turn made the apparent need for a bailout greater, which made things even worse when the bailout plan turned out to be pretty poorly designed in the first place.

Paulson promised transparency and accountability as well, both of which have been sorely lacking.  Paulson is an idiot, who has made the financial crisis even worse than it was before because he has managed the bailout money so poorly.  I was trying to stick by him for awhile, but he has proven time and time again that he really has no idea what he is doing.

http://www.foxnews.com/story/0,2933,425663,00.html

In terms of Bush and Paulson being the biggest proponents of the bailout, it you don't believe me, look at some press releases and such:

WASHINGTON —  Treasury Secretary Henry Paulson said Sunday that the nation's still-frozen credit markets are very fragile and Congress must move quickly to pass a $700 billion bailout package for financial firms.

Paulson said Sunday that the nation's outdated regulatory system for financial market must be overhauled but the first job is to get the most sweeping rescue package since the Great Depression passed by Congress in coming days.

"The credit markets are still very fragile right now and frozen," Paulson said in an interview on NBC's Meet the Press. "We need to deal with this and deal with it quickly."

President Bush, saying he decided to "act, and act boldly," has sent a request to Congress for up to $700 billion to let the federal government to buy up bad mortgages in a move to stem a widespread economic meltdown.

Bush pledged Saturday to work with Congress to quickly pass the rescue package. And he deflected conservative criticism that the government is taking an overbearing approach to stabilizing the financial markets.

"My first instinct was to let the market work," Bush said. But after being briefed by experts on the scope of the problem, he said he realized a "robust and strong" bailout was needed.

“It is a big package because it was a big problem,” Bush said. “The risk of doing nothing far outweighed the risk of the package."

The legislation is part of the largest financial bailout since the Great Depression. Democrats are pressing to require that the plan help more strapped borrowers stay in their homes and to condition the bailout on new limits on executive compensation.

The legislation, a copy of which was obtained by FOX News, grants Treasury Secretary Henry Paulson broad powers to fund or buy mortgage assets from any U.S.-based financial institution. The legislation limits the secretary's buying power to $700 billion, and states that the Treasury's temporary powers would be suspended within two years.

It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion — making room for the massive rescue. Under the proposal, any decisions made by the Treasury would not be subject to a lawsuit.

Administration officials and members of Congress were to negotiate throughout the weekend. The White House and congressional leaders hoped the developing legislation could pass as early as next week.

There was some consternation on Capitol Hill Saturday about a lack of depth in the proposal, though. Lawmakers wondered if it would go far enough.

"This is a good foundation of a plan that can stabilize markets quickly. But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas," Democratic New York Sen. Chuck Schumer, chairman of the Joint Economic Committee, said in a statement.

However, even some House conservatives were ready to concede that the package would likely pass through.

Members of the Republican Study Committee, the most conservative bloc in the House, met in a conference call Saturday to discuss the fiscal crisis legislation. Attempting to put up a fight despite the odds, the group plans to put together an alternative financial crisis plan, perhaps as early as Monday, that would call for deep spending cuts and be aimed at helping struggling Americans with energy and mortgages.

Democrats, too, are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.

House Speaker Nancy Pelosi released a statement saying Congress would work hand-in-hand with the administration on this, but suggesting Democrats would seek the other provisions.

"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said.

"We will also seek to protect lower- and middle-income Americans, who need to be protected from the fallout of the ongoing Wall Street crisis, by enacting an economic recovery package that creates jobs and returns growth to our economy."

Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.

Signaling what could erupt into a brutal fight with Democrats over add-on spending, House Minority Leader John Boehner said "efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve."

If passed by Congress, the plan would give the treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government's first use of the rescue power, and every six months after that.

In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.

In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.

"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.

Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.

"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

So the president proposed a bad plan, and it was passed.

I got an idea. Why don't we have, oh, I don't know, three equally powerful branches of government that keeps things like this from happening? We could even appoint one in charge of our spending, so the president can't just pass whatever he wants.

Man, if we only had something like that.

P.S. Did you miss Nancy Pelosi fighting for this bill to pass? Did she do it because her hero, Bush, proposed it and strong armed her? Is she that much of a slave to him?