Despite comments from Treasury Secretary Hank Paulson one week ago that government interventions had stabilized the banking system, another bailout was announced last night: Banking giant Citigroup will receive $20 billion more in government funds, taken out of the $700 billion rescue package, as well as a guarantee against future losses.
The money comes on top of the $25 billion invested a few weeks ago. That infusion didn't stem Citigroup's problems, with its shares slumping 60 percent last week to a low not seen since 1992. With 200 million customers, Citigroup is even bigger than Lehman Brothers—the group whose September bankruptcy widened the financial crisis—and analysts have warned that its failure would seize up the entire lending market. If Citigroup were to crumble, one expert said, "it would create chaos."
The government's move, therefore, is specifically aimed to guarantee Citigroup's $306 billion in risky assets. Those loans and securities make up approximately one sixth of its $2 trillion in assets. According to the deal, Citigroup will absorb the first $29 billion in losses on these assets. But after that, the treasury and the Federal Deposit Insurance Corp. will take on 90 percent of the remaining losses with money from the $700 billion bailout and FDIC funds.
In return for that investment, the government will receive $7 billion in Citigroup's preferred shares and an additional 254 million shares of common stock. Citigroup also is beholden to certain arrangements, including requiring federal agencies' consent to pay quarterly dividends to shareholders over 1 cent a share. It has to restrict bonuses and other compensation for executives. And the company must help homeowners, including by altering mortgages to help avoid foreclosures.
The immediate result of the announcement? Stocks rallied. The Dow was up 2 percent this morning, with a particular boost to Citigroup, whose stock rose 45 percent. Stock markets surged overseas, and oil prices spiked up almost 3 percent to $51 a barrel. A proposed stimulus package by President-elect Barack Obama seems also to have helped calm investors' fears.
Off Wall Street, though, not everyone was happy at the new use of taxpayers' money. President Bush sought to address some of those complaints, saying in an announcement this morning that the rescue was needed to "safeguard the financial system."