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Citigroup Gets $20 Billion Government Lifeline

NPR's Jim Zarroli and Steve Inskeep discuss the Citigroup rescue on 'Morning Edition'

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Government regulators have again come to the rescue of Citigroup, throwing the troubled banking giant an additional $20 billion lifeline to help it clear a mountain of bad debt and boost confidence amid a sagging share price.

The announcement came late Sunday after discussions led by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Timothy Geithner, president of the New York Fed, who is being tapped by President-elect Obama as his Treasury chief, also participated.

The $20 billion will be used by the government to purchase preferred shares in Citigroup, and it comes on top of a similar $25 billion injection last month.

Regulators will also guarantee $306 billion worth of troubled mortgages and toxic assets.

"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 Vikram Pandit said in a statement on Monday that the company appreciated the "tremendous effort by the government to assure market stability."

The weekend move was meant to telegraph the government's commitment ahead of global markets' opening Monday morning. Last week, Citigroup's share price plummeted. But on Monday, the stock jumped nearly 60 percent to $5.95 per share amid a market rally that sent the Dow Jones industrial average up nearly 400 points.

Citigroup, formed in 1998 by the merger of Citicorp and Travelers Group Inc., has been especially hard-hit by its portfolio of risky mortgages. Two years ago, the bank was the largest by market value. After a year of steep losses, it now ranks fifth.

Under the agreement with the government, Citigroup will assume the first $29 billion in losses on its risky pool of assets; the government would absorb 90 percent of the remaining losses out of the government's $700 billion financial bailout plan and funds from the Federal Deposit Insurance Corp. But the arrangement calls for Citigroup to help distressed homeowners by modifying mortgages to help people avoid foreclosure.

The government hopes it can recoup its investment in Citigroup by reaping an eventual return on 254 million Citigroup shares, which it is set to purchase at $10.61 each.

Last week, Citigroup announced planned layoffs of 52,000 in its global workforce as well as other cost-cutting measures.

Many analysts believe Citigroup is the most vulnerable of the U.S. banking giants.

The move to prop up Citigroup is the latest in a series of dramatic efforts by the government to stabilize the nation's financial infrastructure. In March, the Fed provided financial backing to JPMorgan Chase's buyout of ailing Bear Stearns. Six months later, the government took over mortgage giants Fannie Mae and Freddie Mac and bailed out insurer American International Group.

From wire service reports