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  • November 21, 2008 09:40 AM EST by Elizabeth MacDonald

    The Rescue Plan for Citigroup

    The Federal Reserve, the US Treasury Dept. and the Federal Deposit Insurance Corp. have agreed to help bail out $306 bn in risky loans and securities backed by residential and commercial real estate assets at Citigroup, in an unprecedented intervention to rescue what was once the country's largest bank.

    Insiders say the bank may have no choice but to break itself up in a dramatic restructuring.

    As reported to you Friday, the government now plans to take on the risk of Citi's bad paper in order to rescue the bank--potentially to the tune of $249.3 bn, with the government giving another $20 bn capital injection into the bank on top of the $25 bn it's already received from the government in a capital infusion.

    The sums involved go beyond the government's $29 bn rescue of Bear Stearns, which went through an emergency merger with JPMorgan Chase in March, as well as for now the government's $150 bn bailout of the insurer AIG, and the $200 bn bailout of mortgage finance giants Fannie Mae and Freddie Mac. However, the rescue of AIG, Fannie and Freddie could grow.

    Under the terms of the agreement, Citi absorbs the first $29 bn in losses on the pool, plus 10% on ensuing losses for a total of $56.7 bn in potential losses to the bank.

    As reported to you Friday, the resulting plan now involves the government, including the Federal Reserve, taking on the risk of Citi's bad paper. Some $249.3 bn, for now, is involved, representing less than a tenth of Citi's on-balance and off-balance sheet assets. The asset rescue for now does not include Citi's credit card portfolio.

    The Treasury could take the hit on $5 bn in losses on these assets, the FDIC the next $10 bn with the Federal Reserve potentially backstopping the remaining $234.3 bn in potential losses via a non-recourse loan to Citi (the government does have recourse to Citi assets for the interest portion of the loan).

    Besides Bear's $29 bn in bad credit derivatives (now valued at $27 bn), the Fed is also overseeing $52.5 bn in bad paper from AIG in the government's rescue of the damaged insurer. Both AIG and Bear's assets are held in off-balance sheet funds at the Federal Reserve. The government has funded these vehicles to take on these assets.

    The government will also invest an estimated total of $27 bn in new capital in Citi, on top of the $25 bn in preferred equities it has already bought earlier this year. The Treasury invests about $4 bn, the FDIC, $3 bn, an investment Citi granted in payment for the government's massive backstop on its assets. At its $3.77 closing price on Friday, Citi's $20.5 bn market value was below the government's initial $25 bn purchase of Citi's preferred shares.

    Citigroup gets to keep the income stream from the guaranteed assets. The government's guarantee is in place for 10 years for residential assets, five years for commercial real estate.

    In return, the government will get an 8% dividend on the entire slug of new shares, more than the 5% dividend other banks must pay if they get a TARP injection. The government also receives warrants to buy more Citi shares, some $2.7 bn worth of Citi's common, or about 24 mn shares at an estimated $10.61 each. 

    In exchange, Citi will have to slash its dividend payout to 1 cent per share per quarter over the next three years, down from 16 cents. Citi's stock price has dropped 89% in the last 52 weeks, and Friday closed at $3.77. To date, Citi has raised $75 bn in capital.

    Also, the new plan keeps in place the present management of Citi, including chief executive Vikram Pandit. The government now gets to approve Citigroup's long term compensation and bonuses for executives.

    Citi now has to work to modify the loans underlying the assets in the pool, the Treasury, Fed and the FDIC said in a joint statement. Doing so may help bolster the value of the distressed securities.

    "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 Treasury, Fed and FDIC said in a joint statement.

    And the US government dismissed the notion that it will not come to the aid of other distressed banks with potentially similar moves.

    "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 three said in the joint statement, adding it "will carefully circumscribe the involvement of the government" as it supports bank efforts "to attract private capital."

    Talk inside the bank is that management must move more rapidly to downsize it dramatically--painfully hard to do in a frozen solid credit market. Insiders still say a merger with a deposit-taking bank is not off the table. Citi failed in its attempt to buy Wachovia Bank earlier this year, in an effort to pick up that bank's deposits in order to help plug its balance sheet holes. 

    Citigroup, with $2 tn in assets, $2 tn in liabilities, and $1.2 tn in off balance sheet assets, is too big to fail, government and bank officials say.

    Already, Citi has moved about $80 bn bad assets off its trading portfolio and into its long-term investment portfolio, so it doesn't have to mark those assets to market each quarter and take ensuing writedowns. 

    Citigroup has an outsized balance sheet that is making it difficult to find a merger partner who can digest it. Its $2 tn in assets and $2 tn in liabilities is backstopped by $131 bn in net worth. That net worth is swamped by more than $130 bn in bad assets right now, though Citi adamantly says it has adequate liquidity to see it through the credit crisis and its fundamentals are sound. Another $1.2 tn sits off-balance sheet.

    Citi has recorded $24.7 bn in losses in the last four quarters, with analysts expecting $3.5 bn more in the fourth quarter and tens of billions more down the road. Citi's decision to move $80 bn in severely damaged assets off its trading portfolio and into its long-term investment portfolio or what is called "available for sale" is a Hail Mary pass to try to forestall future writedowns, as it now won't have to mark these assets to market each quarter.

    A Citigroup spokesman declined comment.

    The government's decision to kill its initial plan to buy troubled asset-backed securities has hurt Citi, insiders say. Insiders were disturbed by the government's plan to not let the Troubled Asset Relief Program buy up toxic assets, which could have taken pressure off of Citi's beleaguered balance sheet.

    Citi's balance sheet took on more water when top executives recently opted to bring back onto the bank's financials $17.4 bn in debt securitizations held off-balance sheet in structured investment vehicles.

    Citi's market capitalization is now less than Home Depot, Comcast, Walt Disney, USBancorp, Pepsico, McDonald's, Intel, Amgen, Merck, Qualcomm, UPS, Anheuseur Busch, 3M, Kraft, and Colgate Palmolive.

    Unloading divisions to streamline Citi for a merger would be painful. Being talked about now is having Citi hang on to its consumer retail branches, as well as its wealth management business, which houses Smith Barney and corporate banking, and cash management and transaction processing. Its trading desks and investment banking unit could get dumped, notably the former where many of Citi's problems with a ballooning subprime securities portfolio began. 

    Chief executive Vikram Pandit is adamantly against a breakup and is sticking fast to its "universal" bank model, insiders say, and believes Citi can remain independent, arguing the bank has adequate liquidity. The bank has at least $50 bn of capital in excess of the amount required by regulators to qualify as ``well capitalized," insiders say.

    Deutschebank's Michael Mayo, a top bank analyst on Wall Street, estimates that Citi has a $100 bn cushion against losses, based on tangible equity of $48 bn, the government's $25 bn purchase of preferred shares, and $25 bn in reserves, "which should be enough to cover estimated cumulative lossses of $50 bn" in future quarters.

    Mayo adds that Citi may have anywhere from $7 bn to $20 bn in future writedowns on damaged securities and loans, though it's unclear what sum may be recorded because, as noted, Citi did move $80 bn "away from mark-to-market accounting." Mayo estimates a $9 price target on the stock, based on an estimated 0.9 times estimated third quarter tangible book value.

    To date, bank deposits have held steady, and corporate and brokerage customers so far are not pulling accounts.

    However, events are fast overtaking the bank.

    Merger Partners?

    A government-backed merger with another bank, overseen by the Federal Reserve and the US Treasury Dept., is still a possibility. A merger with a more stable regional bank including US Bancorp  or Wells Fargo has been discussed.

    JPMorgan Chase's name was brought up as well, though JP is still digesting its acquisitions of Bear Stearns and Washington Mutual.

    Goldman Sachs and Morgan Stanley were also discussed as merger partners, as the two are now bank holding companies with access to deposits. A deal with Chevy Chase is moving to the back burner, as Citigroup had considered buying the bank with stock instead of cash, a non-starter given the steep plunge in its share price. Also, Capital One Financial, BB&T Corp., JPMorgan Chase and SunTrust Bank are said to be vying for Chevy as well.   

    One idea, to get the Securities & Exchange Commission to reinstate the short-selling ban, would have little effect as analysts argue that some level of the bank's short interest might be keeping a floor under the damaged stock.

    The White Hot Zone on Citi's Balance Sheet

    What is causing the meltdown in the form of record writedowns at Citi? The numbers are as follows: $18.1 bn in asset-backed collateralized debt obligations, including CDO-squared, and another $22.5 bn in other CDOs as well as subprime loans purchased for sale or securitization. A total of $80 bn in damaged assets.

    Wall Street has pounded the stock down to record lows due to fears that Citi has insufficient capital to absorb mounting loan losses and writedowns to asset-backed securities, despite its protestations of having sufficient capital.

    Buried in Citi's third quarter results, you'll see these numbers: $133.4 bn in assets it can't get a price tag on because the markets are frozen solid for these items. And another $54.4 bn in Kryptonite liabilities, subject to the same iceberg of a credit market. Citi does say it hedges these items.

    Citi also has a $16.9 bn commercial real estate trading book and a credit card division getting pummeled by the credit crisis and a terrified consumer.

    Also, nine of Citi's investment funds have cratered this year.

    Also in a footnote in its third quarter report: Citi has a notional derivatives exposure amounting to $36.8 tn, including equity, commodity and foreign exchange swaps. Trillion--though it of course hedges those positions.

    Employee Anger

    What insiders are saying:

    "This credit crisis is more than a year old. Why didn't our top guys consider a merger with a bank that can take deposits months ago?"

    "Why not do layoffs and do much more asset sales sooner?"

    "Why didn't the leaders announce they would forgo bonuses when they announced this week 52,000 more layoffs (on top of the layoffs already announced, bringing the headcount down by 75,000 to below 300,000)?"

    Note: Pandit and three deputies did recently buy a total of 1.3 mn shares in Citigroup. Those shares are now under water.

    Plunging Consumer Business

    Besides wealth management, Citi's consumer business, its consumer loan and credit card business, has historically stood squarely behind Citi's profits.

    However, the bank's last quarter saw net revenues of $16.7 bn, down 23% from a year ago.

    As consumer confidence has plummeted, sales in Citi's global cards business dropped a precipitous 40% in the last quarter. Delinquencies have risen.

    It's estimated that the slug of Citi's $202 bn in residential mortgages more than three months late doubled to 3.85% versus a year ago. Estimates have it that delinquencies in its auto loan book, amounting to some $19.7 bn, rose to 1.78% from 1.26% a year ago. Overall, the percentage of its consumer loans now delinquent rose to 3.35% in the third quarter versus 1.87% in the same period a year ago.

    The fourth quarter is expected to look worse, as consumer spending has dropped dramatically in October, the steepest drop since 1992 after Gulf War I.

    Costs for bad loans have almost doubled in the past year to $9.07 bn in the third quarter, with net credit losses in the banks' consumer divisions amounting to as much as $8 bn for all of 2009.

    Instead of the Citi that never sleeps, it's now being called Citi, where the writedowns never sleep, so goes the black humor on Wall Street when it comes to its profit results.

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PaleAle

Somehow Bank of America will win on this.

November 21, 2008 at 10:09 am

PaleAle

Your comment above regarding run on deposits ? I kid you not (a phrase I'm not so hot on) - every BIG bank you see running a happy bank ad on TV ? I think anyone one that is running an ad ? is in trouble, if not experiencing a quiet run. Look at Wachovia, or Washington Mutual. Citi runs a lot of ads. I bet they're in trouble. I bet they're in worse trouble than now even. I only have one word. Yahoo

November 21, 2008 at 10:12 am

PaleAle

Citi killed their Citi Student Loan Corp this year. Even Fannie Mae CEO said 160 basis pts above isn't enough for profit on student loans. Just last night it hit me - as I watched the education fund dwindle - nearing 1/2. 1/2 ACTUAL cash put in, as in, 20k cash put in, 14k left. this means NOT ONLY are IRA's being destroyed ? or people retiring now ? having to take up anti-depressants now too ? This ALSO means children's education funds are being burned. Now, I read future education will be more cash only, and less credit. Alan Greenspan said a LONG time ago, if the US doesn't work on education ? we have no competitive work force globally. Here it is ? We just locked many out of university experience through this mess. It's just another side of loss I missed on this coin. That Citi Financial even exists ? citi can happily just go. Citi Financial is the lowest of the sub prime dealers I think. Near the bottom. 40% interest loans - and this is during the GOOD years ! Gee if Citi Financial hit people from 8 to 40 % on loans ? what are their NEW rates going to be ? can we see 100+ % rates ? Borrow $100 at 101% interest ? WOULD that level things ? Probably for citi.

November 21, 2008 at 10:17 am

stevan fagan

citi has done nothing to help those in need , i hope they get no help . they are forcing me into forcloser by ignoring me , as a disabled vet and never in need before i just asked them for a temperary rate change for one year to help and they said no .

November 21, 2008 at 10:24 am

Jersey Grrrl

These are the people who will call to harass you at least once a day every day (from India) if you're a couple days late on your credit card payment - and then report you to the credit bureau! - and THIS is the shape they're in??? Ironic.

November 21, 2008 at 10:25 am

Rick

When Citi goes under the headstone should read "Thanks Hank!" I know that the entire problem isn't the lack of bailout, but rather a bunch of morally corrupt top managers making way too much for running a company into the ground. Where is the accountability?

November 21, 2008 at 10:56 am

Daniel Smith

Well written article, good figures used appropriately. Throughout Citi's problems, they have been square with us as a consumer of credit. We appreciate that they have not rewritten the rate schedule for interest rates that would bury us and cause us to default.

November 21, 2008 at 11:06 am

Dave

I have a home mortgage loan with CitiMortgage - it originally was with ABN AMMRO, a great company, but they sold their mortgage division to Citi. I have never failed to make a payment. What will happen to Citi's mortgage division if they break up? What will happen to my mortgage?

November 21, 2008 at 11:17 am

Kevin

It is understandable as I just got off the phone with citibank. I was trying to pay on my credit card and they would not accept payment as I have already paid the amount equal to my total credit limit one this month. So that means I cant use my card for another month until my next statement. I use the card to make purchases for my small business and I need to turn my money fast. I guess I pay too fast. I have never had a bank refuse to take money. Its easy to see why they are in the condition they are in.

November 21, 2008 at 11:39 am

Kate Danforth

The 3 CEOs need to atone in public. A public apology is in order, not from the 3 collectively, and not from an appointed spokesperson, but for each to look into the camera and say they did not look out for anyone but themselves and this corporate greed has to stop now and it will begin with them. The $28 Mil one of the 3 scoped up for himself last year needs to be shared will the blue collar workers that made it possible for his lack of responsibility towards them.

November 21, 2008 at 11:44 am

PaleAle

So, If Citi closes below 5 today ? auto selloff by Monday ? that's a very interesting point on Citi's $5 min to stay included on pensions, portfolios etc. That's software I imagine that will do the auto selloff.

November 21, 2008 at 12:15 pm

PaleAle

On the FBN comment regarding gold, and why it's not really functioning apart from the markets... Didn't we move to paper standard at the VERY top level of Special Drawing Rights in Feb ? 2008 ? To me, I'd think if at the top level nation states say paper is as good as gold ? I'd think gold lost it's luster back in Feb. 2008 I think gold also became pegged to paper at that point too. Alas, I think gold is no longer what it used to be. Nor is the petro dollar. I swear, living in 2008 - it's not 'what is the path to prosperity' it's more like 'which path has the least debt consequences'. This news on citi's $5 minimum for it to be held in pensions etc, is VERY interesting to me. Doesn't this mean if it closes below $5 today ? forced selloff on citi starts ? forcing it's share value into oblivion ? I mean, it's interesting, Paulson moved from taking toxic waste off it's hand to investing in what appears to be - depending on close today- a burning building. Problem with a spiralling stock value is - Paulson's approach of buying stock into a company becomes worthless - if the stock is worthless. I wonder what other forced selloffs will happen with OTHER companies stock that falls below $5. That's just bad timing for this $5 rule. Kind of funny in a way, that $5 would cause so much havoc.

November 21, 2008 at 12:22 pm

Ron Craig

I'm a part of the CitiGroup family. Very difficult to understand what is going on and how it will effect me as an investor. This is not a new issue, can't understand why those in charge are still holding their high paying jobs. There is the appearence of rewarding poor performance in the "good old boys club". With all the lay-off's why not start ast the top?

November 21, 2008 at 12:30 pm

Nanouk Miller

It's very simple. Banks that did not succumb to CRA-based political and pressure group tactics are doing just fine. When you don't lower lending standards, you don't get toxic paper. Banks should have stood up to politicians like Dodd, Frank, and Concord to publicize what was being asked of them; however, they were complicit in that they became too greedy to look the "gift horse" in the mouth. So many of the SMB-sized banks and thrifts are sound, but are being disadvantaged due to the preferential treatment the "too big to fail" institutions are getting from the Treasury and Fed. No one is "too big to fail"; failure forces its own mental readjustments. Preventing failure just ensures increased unacceptable behavior.

November 21, 2008 at 2:41 pm

Doug

Too big to fail simply means too big. Break them up.

November 21, 2008 at 2:59 pm

Jerimiah

Hey, if Citi is $3.50 right now ? and 5.4 Billion shares out ? that's like 15+ Billion and change for the entire circus. right now - Abu Dhabi could swoop down - buy citi and have #1 - an INSTANT symbol of the west - #2 - on image alone, Dubai could say they are one step closer to becoming the new financial banking center of the world (as was publicly proclaimed). I bet someone zooms down and buys up citi - Dubai wants it for image - and it's part of their collection of US corporations. US Treasury TARP might buy it. Heck they bought 80% of Freddie and Fannie and AIG wants 150 Billion my math says buy the 5.4 billion shared right now, call it $4 a share, unless as you buy, it goes up and you have to compute it at say $7 a share or something... as TARP would be buying and cornering the frozen orange juice market, wait, wrong movie... As TARP would be buying the 5.4 billion shares ? I guess it'd go up somewhat. So, Dubai OR TARP I wager will buy it - and pump it back up. Dubai would never let it fall. I don't think TARP would either. Come to think of it ? Sheesh, is TARP just a fund so Treasury can buy off Dubai from coming in and just buying up TOP US financial institutions? I mean, over HALF of the world's cranes are in Dubai, Their DubaiDisney park ? my god - it's going to have a handful of the world's largest stadiums, it's big. Why not have a collection of top US financial institutions. Then ? we work for oil to heat the home, work for oil to drive to work, and work for oil to run our banks, this just goes on... I'm not sure - I don't think I'll ever visit Dubai. not sure. The do have the world's SECOND largest shopping mall. Why ? it's right down the street from the world's LARGEST shopping mall which is right down the street from the world's tallest building which is right down the street from the New Manhattan replica. just goes on. ALL built on sand from petro dollars. What did we EVER trade when we allowed western oil companies to enable Abu Dhabi to pull so much of our money into the desert - to build DISNEY and INDOOR SKIING. As in that Pink Floyd song - what DID we trade... sheesh Hey, new energy solution changes the whole game. I could be wrong, I'm often wrong, I better not say I'm wrong about being wrong though, madness street. I just want to suggest I think TARP will take some GREAT percentage interest in citi, and they did want to keep a core at citi heh, OR I think Abu Dhabi will come in. It can't fail, heck - Abu Dhabi would buy citi as a hood ornament on a car if it gets to that. My question is when does citi show up on ebay ! (Look at this Martha, says here citi is for sale, here on ebay, says quantity: 20)

November 21, 2008 at 3:36 pm

Jerimiah

I bet TARP tries to bring citi above $5 by 4 pm today.

November 21, 2008 at 4:03 pm

Jason

Come and listen to a story about a man named the Fed A money printing press, to keep the the subprimes fed, Then one day he was messin round with rates, And up through the roof came a bubbling debt fate. Debt that is, fools gold, ain't worth a pea. Well the first thing you know ol Fed's a lookin scared, Bankfolk said "Fed, throw some money everywhere" Said "Washington is the place the debt should be" So they loaded up the truck and moved the public into caves. Holes in Hills, that is, dark and dirty, gloomystairs. Well now its time to say good by to Fed and all his kin. And they would like to thank you folks fer kindly droppin all your taxes in. You're all invited back a gain to this locality To have a heapin helpin of their hospitality If you're to big to fail that is. The rest of yas, Take your shoes off, get used to walkin barefoot Y'all come back now, y'hear?.

November 21, 2008 at 6:57 pm

SlimButtes

I've been reading your blogs lately... great common sense for those of us without a lot of business acumen. This one I found particularly enlightening. Kudos.

November 21, 2008 at 7:44 pm

bob

Believe it or not Citi's mortgage business made good loans. It's the investment bankers that bought the subprime, CDO, and SIV disaster on for the fee income.

November 22, 2008 at 12:00 am

Joe Plummer

The mortgage business had a good thing with Fannie Mae and Freddie Mac. We all benefited from it, but its sounds like investment bankers hijacked the mortgage business and bought up a bunch of junk subprime and sold it as prime (AAA) securities. Its the junk bond scenario all over again. Why did the bank regulators let banks participate? Please tell me somebodies going to jail. Where was congress, the rating agencies, etc..... Remember come election dump your congressman (e.g., Barney Frank)!

November 22, 2008 at 12:09 am

JJ Mclure

im a shareholder so im biased of course. but, i have to say it doesn't look good for common shareholders. the bank will definitely survive. no question. but the dilution of the common shares from dubai or tarp will be devastating. even if citi survives the stock will probably be worthless. i have already written off the stock as gone. and moved on to revovery. i'm done as an individual invester. i don't trust the competence or the fiduciary repsonsibilty of wall street, gov't or capitalism anymore. i have what's left in my 401k mutual funds but i'm going to just save cash the old fashioned way now. probably be ok.

November 22, 2008 at 2:20 am

aaron

Hard to believe now that this whole mess was caused simply by people not paying their bills, whether it be banks, insurance companies, or homeowners.

November 22, 2008 at 4:48 am

tim

i wish in an article on a business web page that they would explain what happens to an individuals bonds, and preferred stocks if a company is sold, or broken into pieces. everyone keeps saying just let them go bankrupt. well many elderly people live off preferred stock interest. they are getting thrown out in the street with the bankruptcies, and it seems they are the last ones people or gov't care about. tim

November 22, 2008 at 9:08 am

You stupid people

You people who are getting on here saying bad crap about this bank are a bunch of retards. This is one of the largest banks in the World and I think it is so dumb the way Fox news is talking down about them. There are several things that has caused this mess that the big America is in. One of the top is stupid politicians lining there pockets and along with that are people who knew good and darn well they could not afford the morgage payments on there big fine houses but yet they took the loans anyway. The other thing that has hurt people is buying these big cars that guzzle gas and the way the big gas companies screwed all of us. This country will always be the way it is right now unless people stop being so freakin greedy and turn back to the principles this country was founded on. So all you nay sayers and stupid fox news just take those words and suck on them until your face turns blue!!!!!!!!!! Then pay your bills!!!!!!

November 22, 2008 at 9:55 am

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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