Citigroup Gets $20 billion Government Capital Infusion

After the demise or government-assisted buyouts of financial services giants like Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, and several smaller institutions — as well as other mergers and acquisitions fueled by liquidity concerns — Citigroup, Inc. has become the latest financial services company to have severe questions about its long-term viability, prompting a capital infusion from the government over the weekend.

Citi, which earlier received government assistance in order to acquire Wachovia, revealed Monday that it reached an agreement with the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp. on a series of steps to strengthen Citi’s capital ratios, reduce risk, and increase liquidity.

The U.S. Treasury will invest $20 billion in Citi’s preferred stock under the Troubled Asset Relief Program (TARP). Citi will also issue an incremental $7 billion in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets.

The financial services firm will issue warrants to the U.S. Treasury and the FDIC for approximately 254 million shares of the company’s common stock at a strike price of $10.61, and will not pay a quarterly common stock dividend exceeding one cent per share for three years effective on the next quarterly common stock dividend payment.

Under the government guarantee, Citi will assume any losses on the $306 billion portfolio up to $29 billion on a pre-tax basis, in addition to Citi’s existing reserve. The government entities will assume 90 percent of any losses above that level and Citi will assume the balance. Citi will retain these assets on its balance sheet and realize the associated cash flow.

“This weekend, the U.S. government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi’s stock price,” said Vikram S. Pandit, Citigroup CEO, in a prepared statement. “We are committed to streamlining our business and providing outstanding banking services to our clients around the world. We will continue to focus on opportunities and alternatives to further enhance the company’s overall position and value.”

“This was definitely a short-term fix, a life line they needed,” said Christine Barry, research director – wholesale banking with Aite Group. “The market would that they sell out part of the business, but this is the best they could come up with for a short-term fix.”

While the government’s move might have produced a short-term solution for Citi, it also continued a “scary” position by the government. “If you’re in trouble, the government will bail you out. And the bailout to date has not been very effective.”

Additionally, even some well-capitalized financial institutions are now seeking government funds, seeing them as a cheap source of capital, according to Barry.

The bailout to date also seems to be limited to large financial institutions. Just after the close of business Friday, the government seized Downey Savings and Loan Association ($12.8 billion in assets), Newport Beach, Calif.; PFF Bank & Trust ($3.7 billion,) Pomona, Calif; and The Community Bank ($681 million), Loganville, Ga.

But neither the banks that will assume the assets of the failed institutions or the banks participating in TARP will ease the reigns on credit until they shore up their deposit bases, which isn’t likely to happen any time soon, according to Barry.

However, the community banks and credit unions are continuing to loan money and are getting an influx of credit and deposit customers, Barry added.