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Government Offers Additional $20B to Shore Up Citi

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Government Offers Additional $20B to Shore Up Citi


Government Offers Additional $20B to Shore Up Citi

Government Offers Additional $20B to Shore Up Citi

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Citigroup stock has moved higher after the government announced a second effort to shore up confidence in the troubled bank. The Treasury Department will backstop the company's bad assets while providing an additional $20 billion in emergency loans.


From NPR News, this is All Things Considered. I'm Melissa Block. First this hour, the troubles of Citigroup and President-elect Barack Obama's plans for stimulus. In a few minutes we'll hear from one of Mr. Obama's top economic advisers. First, to Citigroup. For the first time in days shares of the company finished higher, but it took a massive intervention by the federal government. As NPR's Jim Zarroli reports, this latest bailout presents big risks for taxpayers.

JIM ZARROLI: The shock waves from the latest bailout hadn't yet subsided this morning when President Bush stepped forward to shoulder the responsibility for what had been done. Bailing out Citigroup, he said, was the right thing to do.

(Soundbite of speech)

President GEORGE W. BUSH (United States): We have made this kind of decisions in the past. We 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.

ZARROLI: Right or wrong, the bailout could end up being hugely expensive. The government is essentially buying $20 billion worth of Citigroup's stock, using money from the bailout fund approved by Congress this fall. That's in addition to the $25 billion the company has already received. The government will also agree to back most of a $300 billion portfolio of the company's toxic assets. Bart Narder, a banking analyst at the research firm Celent, says Citigroup has hundreds of billions of dollars in outstanding credit default swaps. Essentially, Narder says, the company has agreed to guarantee an enormous amount of corporate debt, and if it can't pay it the risks for the economy are considerable.

Mr. BART NARDER (Banking Analyst, Celent Research): If Citi were to go under, it is likely that they could drag a whole bunch of other banks, hedge funds, private equity funds along with them.

ZARROLI: In exchange for the $20 billion capital infusion, the government will get $27 billion worth of preferred shares of the company. The shares will pay a dividend of eight percent, economist Simon Johnson of MIT.

Mr. SIMON JOHNSON (Economist, MIT): We're also getting, lucky us, a warrant to buy up to $2.7 billion worth of common stock at a price of $10.61 per share. Now, Citi closed at $3.77 on Friday.

ZARROLI: Johnson says the shares don't begin to make up for the huge risks being taken with taxpayer money. In fact, he says, the terms of the deal are terrible for the government.

Mr. JOHNSON: This, I would say, is a much worse deal than what the auto companies proposed in Washington about 10 days ago. And got the - the management got thrown out of town for asking for too much.

ZARROLI: Johnson says what's worse, it's not even clear that the money the government is putting into the bailout will be enough. He says the deal isn't transparent enough and no one really knows exactly what Citigroup's exposure is to bad assets. But Citigroup officials insisted today that the bailout would help the company get back on its feet after a year in which it took punishing blows. Chief financial officer Gary Crittenden spoke on CNBC this morning.

Mr. GARY CRITTENDEN (Chief Financial Officer, Citigroup): This is a company that is well-capitalized and I think in a good position to go through the - what the environment that we're in.

ZARROLI: Crittenden brushed aside suggestions that the terms of the deal were overly favorable to the company.

Mr. CRITTENDEN: I don't think we won or lost in this process. I think what we've done is increase the confidence that the company has the strength to do what it needs to in this environment.

ZARROLI: If nothing else, the bailout of Citigroup sets a precedent. Until now regulators have used the federal bailout money to buy stock in big banks. Now, for the first time, the government is using taxpayer money to guarantee bad assets. The hope is that such a step will convince investors that Citigroup remains a safe bet, and that the company is ready to get its house in order. Jim Zarroli, NPR News, New York.

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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