US in deal to rescue Citigroup

Toxic assets, tumbling stock threaten bank

NEW YORK - Federal regulators unveiled a radical deal late last night to stabilize Citigroup by taking a $20 billion stake in the struggling bank and guaranteeing hundreds of billions of dollars in risky assets.

The complex arrangement, announced jointly by the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp., calls for the government to back about $306 billion in loans and securities.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The infusion follows an earlier one of $25 billion in Citigroup in which the government received an ownership stake.

The plan, which emerged after a harrowing week in the financial markets and around-the-clock negotiations this past weekend, marks the government's third attempt in as many months to contain the deepening economic crisis.

Citigroup executives presented a plan to federal officials on Friday evening after a week-long plunge in the company's share price threatened to engulf other big banks. In tense negotiations Saturday and yesterday, it became clear that the crisis of confidence had to be defused or the financial markets could plunge further.

If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing stockholders, whose shares have plunged 87 percent this year. A year ago they were trading at about $30; on Friday they closed at $3.77.

Under the agreement, Citigroup and regulators 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 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 FDIC will bear the next $10 billion of losses.

In exchange, Citigroup will issue $20 billion in preferred stock to government agencies, a move that would give taxpayers a benefit but could hurt existing shareholders. The preferred shares will pay an 8 percent dividend.

Citigroup will also agree to certain executive compensation restrictions and put in place the FDIC's loan modification plan, similar to one it recently began.

"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.

Whether this latest rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by increasing losses at Citigroup and other banks. Each previous effort initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook has worsened, raising worries that more bank loans were turning sour.

Political figures were also scrambling yesterday to shore up confidence in the rapidly faltering economy. President-elect Barack Obama signaled that he will pursue a far more ambitious plan of spending and tax cuts than what he had outlined during his campaign.

Obama's choice for Treasury secretary, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, was playing a crucial role in the negotiations with Citigroup. 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 deal 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 money directly into financial institutions. Neither plan restored investors' confidence for long.

"It's been one announcement after another that has had substance, but not enough teeth," Charles R. Geisst, a financial historian and professor at Manhattan College. "By intervening, they are giving the market some heart to temporarily stave off some fear - but you can only push that so much."

Once the world's largest bank with $274 billion in market value at the end of 2006, Citigroup now is worth slightly more than $20 billion, making it smaller than the three largest Canadian banks. Last week was particularly brutal, with the stock market slicing 60 percent more from its value.

Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year, and few analysts think the pain is over. Many investors worry that the bank needs additional capital.

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. Indeed, Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

Founded in 1812 as City Bank of New York, it merged with Travelers Group - itself a combination of insurer Travelers, brokerages Salomon Brothers and Smith Barney, and financial planner Primerica - in 1998. It is the world's largest provider of credit cards.

In Massachusetts, Citigroup has about 1,500 employees and operations that include 31 bank branches and investment banking offices.