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Nickelless
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 Posted - 11/25/2008 : 05:32:38
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By Eric Dash
Monday, November 24, 2008
NEW YORK: Citigroup will halt dividend payments for the next three years and agree to restrictions on executive compensation under terms of the U.S. government rescue of the struggling bank, it was revealed Monday.
Citigroup had to make the concessions in return for the U.S. government's direct investment of about $20 billion in the bank and an agreement to back about $306 billion in loans and securities.
Investors reacted positively to the rescue, sending stocks higher on Wall Street and the big European exchanges. The Dow Jones industrial average was 280 points higher in midafternoon trading, extending its 300-point rally Friday as financial shares began to recover. The Standard & Poor's 500-stock index rose 4.7 percent. The Dow Jones Euro Stoxx 50, an index of blue-chip shares, closed up 9.9 percent, as did the FTSE 100 in London.
Shares of Citigroup - perhaps the market gauge most widely watched Monday morning - were 53 percent higher and traded above $6 a share for the first time since Thursday. A year ago, the shares were trading at about $30.
Bank of America, Goldman Sachs and Merrill Lynch were all up about 15 percent in New York on Monday. JPMorgan shares gained 9 percent and Morgan Stanley was up 23 percent.
Banking executives said the decision to support Citigroup, while necessary, could draw a firestorm of criticism from smaller institutions that were not considered big enough to warrant a government rescue.
The ultimate cost of the deal depends in large part on whether the government has to cover losses on those assets, which are mostly residential and commercial real estate loans.
The rescue, announced late Sunday after a harrowing week in the financial markets, is the government's third effort in three months to contain the deepening economic crisis and may set the precedent for other multibillion dollar rescues in the financial sector.
President George W. Bush said Monday that more such rescues could be arranged if they become necessary.
In pledging similar assistance, Bush said, "We have made these kind of decisions in the past, made one last night, and if need be we're going to make these kind of decisions to safeguard our financial system in the future."
Speaking from the steps of the Treasury Building, with Treasury Secretary Henry Paulson Jr. beside him, Bush said Paulson was working closely with the transition team of President-elect Barack Obama, and that the new president would be kept informed.
"It's important for the American people to know that there is close cooperation," Bush said.
With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
Citigroup executives presented a proposal to U.S. government officials Friday evening after a weeklong plunge in the company's share price threatened to engulf other big banks. In tense, round-the-clock negotiations that stretched until almost midnight Sunday, it became clear that the crisis of confidence had to be defused immediately or the financial markets would plunge further.
Whether this latest rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by losses at Citigroup and other banks. Each previous government effort initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook worsened, raising worries that more bank loans were turning sour.
Obama's choice for Treasury secretary, Timothy Geithner, the president of the Federal Reserve Bank of New York, played a crucial role in the negotiations Friday but took a less active role once news of his appointment was circulated. While the initial focus of government officials was to help the embattled company, they may also seek to draw up an industrywide plan that could help other banks.
The Citigroup plan could herald another shift in the government's financial rescue. The Treasury Department first proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions. Neither plan, however, restored investors' confidence for long.
"By intervening, they are giving the market some heart to temporarily stave off some fear - but you can only push that so much," said Charles Geisst, a financial historian and professor at Manhattan College.
Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank's balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.
Any remaining losses will be split unequally between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.
In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.
Citigroup will effectively halt dividend payments for the next three years and will also agree to certain executive compensation restrictions, which will be reviewed by regulators. It will also put in place an FDIC plan to modify mortgage loans to help borrowers hold onto their homes, which is similar to a program Citibank recently announced.
The government said it was taking the step to bolster the economy while protecting taxpayers.
"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 regulators said in a joint statement Sunday.
Vikram Pandit, the Citigroup chief executive, met with the bank's board Saturday, and there was no indication that the directors would seek to replace him.
Once the largest and mightiest U.S. financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year now, and few analysts think the pain is over. Many investors worry that it needs more capital.
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