The U.S. government has entered into an agreement with Citigroup to provide the struggling financial services giant with a package of guarantees, liquidity access and capital.
As part of the agreement, the Treasury and the Federal Deposit Insurance Corporation (FDIC) will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet.
As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and the FDIC. In addition and if necessary, the Federal Reserve says it stands ready to backstop residual risk in the asset pool through a nonrecourse loan.
In addition, the Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program. Under the guarantee, Citi will assume any losses on the portfolio up to $29 billion on a pretax basis. The government entities will assume 90% 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.
In addition to its extensive access to existing liquidity sources, Citi has been provided expanded access to both the Federal Reserve's Primary Dealer Credit Facility and the discount window, resulting in additional liquidity resources should they be needed. Citi also has access to the Federal Reserve's Commercial Paper Funding Facility, which has yet to be used, and intends to issue debt under the FDIC's Temporary Liquidity Guarantee Program, according to an FDIC press statement.
The agreement includes an executive compensation plan, and Citi will implement a government-backed plan to modify distressed mortgages.
‘We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk and increase liquidity," says Vikram S. Pandit, Citi's CEO. "We appreciate the tremendous effort by the government to assure market stability.