WASHINGTON — To help stabilize Citigroup Inc., the government announced it would guarantee $306 billion in assets and pump an additional $20 billion in capital into the New York bank.
"The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital," said a Treasury statement issued just before midnight on Sunday.
In a conference call with reporters shortly after the Treasury's announcement, government officials said their move was designed to shore up confidence – both in the broad economy and in large banks.
The asset guarantee would cover loans and securities backed by residential real estate and commercial real estate, their associated hedges, and other assets. Under the government's terms, Citigroup would agree to take a first loss position on $29 billion in assets. Further losses would be split, with the government taking 90% and Citigroup taking 10%.
The Treasury Department would be responsible for the next $5 billion in losses, and the Federal Deposit Insurance Corp. would cover the next $10 billion. The Federal Reserve Board would cover any amount beyond that in the form of a non-recourse loan.
The board of the central bank voted unanimously Sunday to approve the government's latest steps.
The assets were marked to market recently and, therefore, are a relatively precise measurement of how much they are currently worth, government officials said. Those officials indicated that Citi's management finds the market's concerns over the value of its assets to be overblown.
The holdings are all on-balance sheet assets at Citi. In an effort to improve investor confidence, the bank said last week it planned to bring more of its structured-investment vehicles onto its ledger.
The government now plans to give Citi a "template to manage guaranteed assets," according to a term sheet the Treasury released late Sunday.
The latest steps come on top of $25 billion in capital the bank has already accepted from Treasury's Troubled Asset Relief Program. The new injection will count towards Citi's Tier 1 capital requirement.
Until Sunday, the Bush administration had $60 billion left in the Tarp that it could distribute without seeking further congressional approval. With the latest injection into Citi, the outgoing administration has $40 billion in Tarp funds at its disposal.
Timothy Geithner, the president of the Federal Reserve Bank of New York, who is expected to be named President-elect Barack Obama's Treasury secretary on Monday, was involved in the weekend discussions about Citi, government officials said.
The terms of the government's deal with Citi underscore just how long policymakers will be grappling with the fallout from the financial crisis. The FDIC's guarantee will last 10 years for Citi's residential assets and five years for other holdings.
Despite rumors, Citigroup would not be forced to accept any managerial changes. Instead the bank would have to accept the same parameters as the Tarp program, including allowing the government to take warrants for preferred stock with an 8% dividend to the Treasury and accepting executive compensation restrictions like bans on golden parachutes.
The government's shares will be non-voting.
Citi is also banned from paying common stock dividends of more than a penny per share each quarter for the next three years unless it receives permission from the Treasury, FDIC and Fed.
Citigroup would also implement the FDIC's mortgage modification program, under the deal.