$20 billion bail-out for Citi

The US government has given Citigroup a lifeline via a $20 billion direct capital injection and a guarantee for $306 billion in securities.

Officials from the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) were locked in crisis talks with Citi representatives over the weekend after shares in the bank slumped to $3.77 at close of trading on Friday from $9.52 the week before. The decline came despite Citi receiving $25 billion from the Treasury's Capital Purchase Programme (CPP) in October.

The package contains two principal measures to prop up the bank. First, the Treasury will buy $20 billion of preferred stock under the Troubled Assets Relief Programme (Tarp) at $1,000 per share. Citi will pay the Treasury a dividend of 8%, which will be subject to the same guidelines as the CPP.

Secondly, the government will guarantee a $306 billion portfolio of securities backed by a range of assets, including residential mortgages, commercial real estate and other loans. In return, Citi will issue another $7 billion in preferred stock to the government - $3 billion to the FDIC and $4 billion to the Treasury.

This second initiative envisages Citi absorbing all losses on the portfolio up to $29 billion, and thereafter 10% of any further losses, while the government will shoulder the remaining 90%.

Thanks to the government's guarantee, the risk weighting for assets in the portfolio will be 20%, freeing up a further $16 billion for Citi. This will add to the $20 billion received from the Tarp, while half of the $7 billion raised from issuing preferred stock to the government has been earmarked for capital purposes.

The result should be a substantial boost in liquidity for Citi, which estimates its Tier I capital ratio should rise to 14.8% as it benefits from almost $40 billion in extra capital. Citi will also need to gain government approval for executive compensation plans and pay a dividend of only 1% per quarter on common stock for the next three years. Citi must also implement the FDIC's mortgage modification programme.

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