Citigroup Bailout Leaves Shareholders in the Cold
November 24 2008
Citibank news is good for the upper management group at Citigroup! A Citibank marks the third time in recent months that Uncle Sam – and by extension you and I – offers a helping hand and million of dollars in an attempt to keep a financial institution from going under.
Citibank Bailout Prevents Citibank Bankruptcy … For Now
WMDT, ABC reports that $20 billion from the $700 billion package will indeed be invested in Citibank. In return, Uncle Sam – and you and I – receive $7 billion of “preferred shares.” But wait, there is more!
The Washington Post reports that in addition to the funds, Uncle Sam will also take on the role of protector against future losses. While Citigroup would have to eat the next $29 billion in losses it shows, the United States government will cover “most of the losses beyond that amount.”
Wagging tongues assert that what is needed, really, is Citibank bankrupt, but the Citibankin addition to the prior investment of $25 billion that Uncle Sam already dropped into Citigroup, may halt this process.
Citigroup Bailout and Its Effect on Shareholders
The Citigroupis not as favorable for shareholders as early estimates had hoped. This Citi package is supposedly going to require a curtailing of executive level pay, but it most certainly decreases share dividends to $0.01/share/quarter for a period of three years.
Citibank Bailout Rewards Bad Behavior
Citibank business practices have been making headlines over the last decade, most notably its 2004 short sale on the European bond market and its theft of funds from 53,000 credit card customer accounts.
Lest you forget, it was Citigroup’s 1998 lobbying efforts, as reported by Open Secrets, that paved the way for banks to get involved in other forms of business such as insurance. Citibank lobbyists were also front and center when bankruptcy reform was discussed, and consumers currently hoping for Chapter 7 relief know how much more difficult this process has become.
Beholden to politicians, Citibank has heavily investment in the American political process, favoring the Democratic Party with $2,248,481 versus the Republican Party which only received $1,483,884. This totals $3,736,915 in overall political donations that perhaps could have been better spent protecting the company from its impending losses.
Citibank Bailout May Not Halt Layoffs
There is no word if the Citigroup San Francisco Chronicle reported on last week.will prevent the loss of more than 50,000 Bay Area jobs the
U.S. agrees to invest $20 billion to bailout Citigroup
November 24 2008
Citigroup Inc. reached an agreement with the U.S. Treasury, the Federal Reserve Board and the Federal Deposit Insurance Corp. over the weekend that will inject $20 billion worth of new capital into the company.
This is in addition to the $25 billion infusion already approved by the government through the Troubled Assets Relief Program (TARP).
Citi (NYSE: C) officials in New York say the move will strengthen the company’s capital ratios, reduce risk and increase financial liquidity. The plan was unanimously approved by the lender’s board of directors.
Under the terms of the agreement, the U.S. Treasury Department will invest $20 billion in Citi preferred stock under the TARP.
The TARP is the $700 billion financial rescue package approved by Congress in September. The Treasury Department is offering to purchase up to $250 billion worth of senior preferred shares of U.S.-controlled banks and savings associations. The program is designed to provide financial institutions with fresh capital in exchange for the government taking an equity stake in the lenders.
Citi will also issue $7 billion in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 billion worth of securities, loans and commitments backed by residential and commercial real estate and other assets.
The guarantee, Citi officials say, will free up an additional $16 billion worth of capital for the company.
Citi has also agreed to issue warrants to the U.S. Treasury and FDIC for some 254 million shares of the company’s stock at a strike price of $10.61. Citi has also agreed to limit its quarterly common stock dividend to one-cent per share for the next three years.
Under this agreement, Citi will assume any losses on the portfolio for up to $29 billion on a pretax basis. The government agencies, in turn, will assume 90 percent of any losses above that level.
Citi has also been provided with expanded access to the Federal Reserve’s Primary Dealer Credit Facility and the discount window. This will provide additional liquidity for the lender, if needed. Citi also has access to the Federal Reserve’s Commercial Paper Funding Facility.
The agreement specifies that the company’s executive compensation plan, including bonuses, must be submitted to and approved by the U.S. government.
“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,” Citi CEO Vikram S. Pandit said in a statement. “We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity. We appreciate the tremendous effort by the government to assure market stability.”
A week ago, Citi announced that it plans to eliminate 53,000 jobs as the company works to stem financial losses. The company posted a third-quarter loss of $2.8 billion.
The lender employs 17,000 people in Texas. Citi operates a call center in Northwest San Antonio and has 10 Citibank branches in the city.
In October, the company lost a bidding war with Wells Fargo (NYSE: WFC) over the purchase of Wachovia Corp. Wells Fargo is in the process of buying Wachovia for $15.1 billion.