The plan to rescue Citigroup was finally announced early Monday morning, following a tense weekend of round the clock negotiations. The plan include a backstop of $306 billion in troubled assets, a $20 billion capital injection and leaves in place the current management.
The question on everyone’s mind is: will it work?
Here are some highlights of the stunningly complex plan. (You can read the joint statement by the Fed, FDIC and Treasury here. Citi’s press release is here.)
- A huge amount of troubled assets backstopped by the government. It’s no wonder that Hank Paulson and other had to cancel the original TARP plan to buy up troubled assets. A Citi alone there are apparently over $300 billion of assets that needed to be backstopped. That’s 40 per cent of the entire TARP at one bank.
- The Four Step Backstop. The backstop of the troubled asset portfolio has a four step waterfall for losses.
- The first $29 billion of losses from the portfolio will be absorbed by Citi entirely.
- The Treasury Department will take 90 per cent of the next $5 billion of losses, with Citi taking the rest.
- The Federal Deposit Insurance Corporation will step in and take 90 per cent of the next $10 billion of losses while Citi absorbs the balance.
- Losses beyond that will be taken by the Federal Reserve in the 90 per cent government role. Note that Citi is still supposed to take the remaining 10 per cent at this stage but it’s hard to believe that anyone really thinks Citi would be able to take any more losses once it had written down $40 billion more in this portfolio.
- Capital Injection. Citi is getting a $20 billion capital injection. This comes on top of the $25 billion it received only a few weeks ago. In exchange, the government is getting preferred equity that wil pay an 8% dividend. The government will also get warrants with its preferred.
- Citi Pays For Backstop With Preferred. Citi is also being required to pay for that FDIC, Fed and Treasury backstop by issuing an additional $7 billion of preferred stock to the Treasury and the FDIC.
- Dividend Cut. Citi is barred from paying the common stockholders a dividend exceeding one cent per share for three years.
- Compensation approval. While the current management has been allowed to remain in place, their compensation must be approved by the Treasury Department.
- Loan Modification. Citi agreed to participate in the FDIC’s loan modification program, providing direct relief to homeowners burdened with unmanageable mortgages. We kind of thought they were doing this anyway.
- DIscount Window Stuff. Citi has been provided expanded access to both the Federal Reserve’s Primary Dealer Credit Facility and the discount window. Citi also has access to the yet-unused Federal Reserve’s Commercial Paper Funding Facility and intends to issue debt under the FDIC’s Temporary Liquidity Guarantee Program. All this stuff was already in place, but the government wants us to remember it.
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