The government Sunday night unveiled a bold plan to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.
WASHINGTON — The government Sunday night unveiled a bold plan to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.
The action, announced by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC), aims to shore up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.
“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said.
“We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks,” they said of the government’s latest high-profile bailout effort.
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The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. It follows a $25 billion one in Citigroup in which the government received an ownership stake.
As part of the plan, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.
Under that arrangement, Citigroup will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent.
Money from the $700 billion bailout and funds from the FDIC would cover the government’s portion of potential losses.
The Federal Reserve would finance the remainder with a loan to Citigroup.
As a condition of the rescue, Citigroup is barred from paying quarterly dividends to investors of more than 1 cent a share for three years unless the three agencies approve.
The agreement also places restrictions on executive compensation, including bonuses.
Citigroup has seen its stock lose 60 percent of its value in the past week, reflecting a crisis of confidence among skittish investors.
Banking-industry officials said the decision to support Citigroup, while necessary, would draw fire from smaller institutions that are not big enough to be saved.
“This is going to create a firestorm,” said a banking-industry insider who requested anonymity because he has numerous institutions as clients. “What do you say to people like Wachovia or National City or smaller or midsize banks?”
Information from The New York Times was included in this report.