(25 November 2008 – USA) The US Government has taken its biggest step yet to prevent the collapse of a big bank, by agreeing to rescue Citi from its risky assets and inject much needed capital.The Government has agreed to shoulder most of the potential losses from US$306 billion (A$ 475 billion) in its risky assets and inject US$20 billion in new capital,
The bailout comes after an announcement by Citi that it would shed over 50,000 of its 350,000 plus workforce.
The US$20 billion of government capital comes after it injected US$25 billion last month. In this round, the government is buying preferred stock that will pay an 8 percent dividend.
In exchange for the bailout, Citigroup slashed its quarterly dividend to a penny per share from 16 cents. It cannot raise the payout for three years without U.S. consent.
Citigroup will absorb the first US$29 billion in losses on the US$306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. The Treasury Department, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest.
The US government is also getting warrants to buy US$2.7 billion in Citigroup common stock at US$10.61 per share for a potential 4.5 percent stake. That’s on top of the roughly 3.3 percent the government is entitled to buy under a previous deal.
Citigroup has estimated the injection will give it a Tier 1 capital ratio of 14.8 percent, more than twice what the government requires. The government also increased Citigroup’s access to the Federal Reserve’s discount window, which will add liquidity.