Citigroup Gets U.S. Rescue From Losses, Cash Infusion (Update1)

Nov. 24 (Bloomberg) — Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.

The second-biggest U.S. bank by assets surged as much as 72.4 percent in New York trading after the Treasury, Federal Reserve and Federal Deposit Insurance Corp. announced the aid plan in a joint statement. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend.

The regulators stepped in to protect Citigroup from losses on a $306 billion pile of troubled U.S. home loans, commercial mortgages, subprime bonds and corporate loans when the firm’s tumbling share price sparked concern that depositors might pull their money and destabilize the company, which has $2 trillion of assets and operations in more than 100 countries. The $20 billion of new cash comes on top of a $25 billion infusion the bank received last month under the Troubled Asset Relief Program, passed by Congress to shore up the financial industry.

“It really was a must-do thing,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $85 billion. “If they’d let Citigroup go, that would’ve been disastrous.”

Citigroup’s stock sank about 80 percent this year and dropped below $5 last week for the first time since 1994. The shares closed last week at $3.77 on the New York Stock Exchange. They gained 65 percent to $6.22 at 11:00 a.m. in NYSE composite trading today, after rising as high as $6.50.

Dividend Cut

Citigroup shareholders will be diluted in the “near term by the cost of the incremental preferred stock,” Morgan Stanley analysts Betsy Graseck and Cheryl Pate wrote in a report today. Over the longer term, Citigroup will appreciate because of “the reduction in tail risk” from the troubled assets, they said.

“There will surely be ongoing chatter about a breakup of Citi once the dust settles,” analysts at Royal Bank of Scotland Group Plc, led by Tom Jenkins, said. “For now though, and indeed for the foreseeable future, Citi has oxygen.”

Former Chairman Sanford “Sandy” Weill, 75, built Citigroup through more than 100 acquisitions during his 17 years at the helm. The company, which two years ago was the biggest by market value, has slipped to No. 6 after racking up four straight quarterly losses totaling $20 billion amid the worst financial crisis since the Great Depression.

Through last week, Citigroup shares had declined 67 percent since Weill formed the company in 1998 through the merger of Citicorp and Travelers Group Inc.

Protect Taxpayers

The government’s preferred shares come with warrants to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment, according to a term sheet that accompanied the agencies’ statement. Citigroup is required to pay a quarterly dividend of no more than 1 cent a share for the next three years, down from 16 cents in the most recent quarter.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers,” the agencies said.

Citigroup Chief Executive Officer Vikram S. Pandit said the agreement addresses “market confidence and the recent decline in Citi’s stock,” and also strengthens the bank’s “capital ratios.” The company said its so-called Tier 1 capital ratio exceeds 14 percent with the support from the government.

Pandit’s Job

Terms of the asset guarantees mean Citigroup will cover the first $29 billion of pretax losses from the $306 billion pool, in addition to any reserves it already has set aside. After that, the government covers 90 percent of the losses, with Citigroup covering the rest from assets that include leveraged loans and so-called structured investment vehicles.

Unlike the bailouts of insurer American International Group Inc. and mortgage companies Fannie Mae and Freddie Mac, no management changes were required and Pandit gets to keep his job, government officials said. The government will have a say over executive compensation at Citigroup.

“This is a partial government takeover,” Christopher Whalen of Institutional Risk Analytics, a Torrance, California- based research firm, said in a Bloomberg Radio interview. “We have been telling people for a while that some of the top banks were going to end up controlled by the government next year. It looks like that’s happening sooner than even we expected.”

Gary Crittenden, Citigroup’s finance chief, said on CNBC that the government aid is “not a nationalization in any sense.”

Prince, Alwaleed

Pandit, 51, a former Morgan Stanley banker, joined Citigroup last year as head of hedge funds and private equity, and he was picked in December to succeed Charles O. “Chuck” Prince after the bank’s expansion in subprime mortgages and asset-backed lending backfired.

Pandit announced a plan last week to eliminate 52,000 jobs and cut costs by about $2 billion per quarter. He and three top deputies bought 1.3 million shares in a show of confidence, and Prince Alwaleed bin Talal, one of the bank’s biggest investors, said he would boost his stake to about 5 percent from 4 percent.

Citigroup also issued a statement last week saying the company had “a very strong capital and liquidity position and a unique global franchise,” and Pandit held two conference calls with employees to reassure them.

The stock kept plunging, forcing the bank’s board to hold an emergency meeting on Nov. 21 and thrusting executives into a weekend of discussions with the Fed and Treasury. The slump was reminiscent of what happened to Bear Stearns Cos. in March before it was sold to JPMorgan Chase & Co. and to Lehman Brothers Holdings Inc. before it went bankrupt in September.

Loan Losses

“Pretending that Citi is going to be a going concern I think is silly,” said Whalen, of Institutional Risk Analytics. “We should be thinking about breaking this company up and redistributing the assets into stronger hands.”

The added capital and the asset guarantees are intended to provide confidence to investors that Citigroup has a big enough loss cushion to absorb bad loans as unemployment climbs and the economy sours.

The rescue was “structured in a way that existing debt holders are not impaired and equity investors are not overly diluted,” CreditSights Inc. analysts led by David Hendler wrote in a report today. “All in all, these actions should settle market jitters surrounding the company for now and provide a boost for bondholders.”

Citigroup remains vulnerable to losses on loans and securities outside the U.S., said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees $8 billion and holds Citigroup shares.

The government plan “gives them a little bit of breathing room, but longer term, things may deteriorate and losses increase,” said Kovalski. “The Achilles heel with Citi is their exposure to emerging markets and what’s going to happen when emerging markets turn down, as they’re doing now.”

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