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Monday, 24 November 2008
U.S. Plan to Aid Citigroup Said to Be Near Approval
Federal regulators were nearing approval of a radical plan to stabilize Citigroup on Sunday in which the government would soak up tens of billions of dollars in losses at the struggling bank, according to people briefed on the discussions.
U.S. Plan to Aid Citigroup Said to Be Near Approval
By ERIC DASH 24 November 2008
Federal regulators were nearing approval of a radical plan to stabilize Citigroup on Sunday in which the government would soak up tens of billions of dollars in losses at the struggling bank, according to people briefed on the discussions.
The plan, which emerged after a harrowing week in the financial markets, would be the government’s third effort in three months to contain the deepening economic crisis. While the negotiations with Federal Reserve and Treasury Department officials were in flux on Sunday night, the proposal, if applied to other banks, could set the precedent for other multibillion-dollar financial rescues.
Citigroup executives presented a plan to federal officials on Friday evening after a weeklong plunge in the company’s share price threatened to engulf other big banks. In tense, around-the-clock negotiations that stretched through the weekend, it became clear that the crisis of confidence had to be defused now or the financial markets could plunge further.
Whether this rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by losses at Citigroup and other banks. Each previous government effort initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook worsened, raising worries that more bank loans were turning sour.
President-elect Barack Obama was also working over the weekend to shore up confidence in the rapidly faltering economy. Mr. Obama signalled that he would pursue a far more ambitious plan of spending and tax cuts than he had outlined during his campaign and planned to announce his economic team on Monday. Some Democrats in Congress, meantime, were calling for the government to spend as much as $700 billion to stimulate the economy over the next two years.
Mr. Obama’s expected choice for Treasury secretary, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, was playing a crucial role in the negotiations with Citigroup. While the initial focus of government officials was to help the embattled company, they may also seek to draw up a industry wide plan that could help other banks.
Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks, who spoke on the condition that they not be identified because the plan was still under discussion.
If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing shareholders.
The plan could herald another shift in the government’s financial rescue. The Treasury Department first proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions. Neither plan, however, restored investors’ confidence for long.
“It’s been one announcement after another that has had substance, but not enough teeth,” Charles R. Geisst, a financial historian and professor at Manhattan College. “By intervening, they are giving the market some heart to temporarily stave off some fear — but you can only push that so much.”
Banking industry officials said the decision to support Citigroup, while necessary, could draw criticism from smaller institutions that were 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 mid-size banks?”
It was unclear on Sunday night exactly how the Citigroup arrangement might work. Citigroup executives and regulators were combing through Citigroup’s books to identify pockets of real estate and other risky assets, trying to determine the level of losses the government was willing to bear. Another question is whether any additional government money for Citigroup, which has already received $25 billion under the initial rescue plan, would come from the $700 billion industry bailout that Congress approved in October or from other sources, like the Federal Reserve or the Federal Deposit Insurance Corporation.
Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders because they would not immediately dilute the value of their investments as much as preferred stock.
Inside Citigroup’s Park Avenue headquarters, the mood was tense. Through the weekend, Robert E. Rubin, the former Treasury secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M. Paulson Jr. Vikram S. Pandit, Citigroup’s chief executive, spoke to regulators and lawmakers. Mr. Pandit also met with Citigroup’s board on Saturday, and there was no indication that they would seek to replace him.
Once the nation’s largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year now, and few analysts think the pain is over. Many investors worry that the bank needs additional capital.
With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
Even so, federal regulators want to restore confidence in the company without being seen as bailing out its shareholders.
Citigroup executives reached out to Federal Reserve and Treasury last week as they sought to stabilize the company’s stock, which has plunged 87 percent this year.
The plan under discussion is reminiscent of the one that Citigroup and the F.D.I.C. worked out in October to smooth Citigroup’s proposal to buy the Wachovia Corporation. That deal fell through, however, when Wells Fargo swept in with a higher offer.
Under that plan, Citigroup agreed to bear a certain level of Wachovia’s losses, with the federal agency absorbing the rest. In exchange, Citigroup agreed to pay the F.D.I.C. in preferred stock.
It is also similar to an effort orchestrated by Swiss financial regulators for UBS, another big global bank. Last month, the Swiss central bank and UBS reached an agreement to transfer as much as $60 billion of troubled securities and other assets from UBS’s balance sheet to a separate entity. UBS’s shareholders are scheduled to vote this week on the plan, which would involve the bank’s putting up $6 billion in equity. The Swiss central bank would control the new entity and lend it $54 billion.
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U.S. Plan to Aid Citigroup Said to Be Near Approval
By ERIC DASH
24 November 2008
Federal regulators were nearing approval of a radical plan to stabilize Citigroup on Sunday in which the government would soak up tens of billions of dollars in losses at the struggling bank, according to people briefed on the discussions.
The plan, which emerged after a harrowing week in the financial markets, would be the government’s third effort in three months to contain the deepening economic crisis. While the negotiations with Federal Reserve and Treasury Department officials were in flux on Sunday night, the proposal, if applied to other banks, could set the precedent for other multibillion-dollar financial rescues.
Citigroup executives presented a plan to federal officials on Friday evening after a weeklong plunge in the company’s share price threatened to engulf other big banks. In tense, around-the-clock negotiations that stretched through the weekend, it became clear that the crisis of confidence had to be defused now or the financial markets could plunge further.
Whether this rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by losses at Citigroup and other banks. Each previous government effort initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook worsened, raising worries that more bank loans were turning sour.
President-elect Barack Obama was also working over the weekend to shore up confidence in the rapidly faltering economy. Mr. Obama signalled that he would pursue a far more ambitious plan of spending and tax cuts than he had outlined during his campaign and planned to announce his economic team on Monday. Some Democrats in Congress, meantime, were calling for the government to spend as much as $700 billion to stimulate the economy over the next two years.
Mr. Obama’s expected choice for Treasury secretary, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, was playing a crucial role in the negotiations with Citigroup. While the initial focus of government officials was to help the embattled company, they may also seek to draw up a industry wide plan that could help other banks.
Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks, who spoke on the condition that they not be identified because the plan was still under discussion.
If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing shareholders.
The plan could herald another shift in the government’s financial rescue. The Treasury Department first proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions. Neither plan, however, restored investors’ confidence for long.
“It’s been one announcement after another that has had substance, but not enough teeth,” Charles R. Geisst, a financial historian and professor at Manhattan College. “By intervening, they are giving the market some heart to temporarily stave off some fear — but you can only push that so much.”
Banking industry officials said the decision to support Citigroup, while necessary, could draw criticism from smaller institutions that were 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 mid-size banks?”
It was unclear on Sunday night exactly how the Citigroup arrangement might work. Citigroup executives and regulators were combing through Citigroup’s books to identify pockets of real estate and other risky assets, trying to determine the level of losses the government was willing to bear. Another question is whether any additional government money for Citigroup, which has already received $25 billion under the initial rescue plan, would come from the $700 billion industry bailout that Congress approved in October or from other sources, like the Federal Reserve or the Federal Deposit Insurance Corporation.
Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders because they would not immediately dilute the value of their investments as much as preferred stock.
Inside Citigroup’s Park Avenue headquarters, the mood was tense. Through the weekend, Robert E. Rubin, the former Treasury secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M. Paulson Jr. Vikram S. Pandit, Citigroup’s chief executive, spoke to regulators and lawmakers. Mr. Pandit also met with Citigroup’s board on Saturday, and there was no indication that they would seek to replace him.
Once the nation’s largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year now, and few analysts think the pain is over. Many investors worry that the bank needs additional capital.
With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.
Even so, federal regulators want to restore confidence in the company without being seen as bailing out its shareholders.
Citigroup executives reached out to Federal Reserve and Treasury last week as they sought to stabilize the company’s stock, which has plunged 87 percent this year.
The plan under discussion is reminiscent of the one that Citigroup and the F.D.I.C. worked out in October to smooth Citigroup’s proposal to buy the Wachovia Corporation. That deal fell through, however, when Wells Fargo swept in with a higher offer.
Under that plan, Citigroup agreed to bear a certain level of Wachovia’s losses, with the federal agency absorbing the rest. In exchange, Citigroup agreed to pay the F.D.I.C. in preferred stock.
It is also similar to an effort orchestrated by Swiss financial regulators for UBS, another big global bank. Last month, the Swiss central bank and UBS reached an agreement to transfer as much as $60 billion of troubled securities and other assets from UBS’s balance sheet to a separate entity. UBS’s shareholders are scheduled to vote this week on the plan, which would involve the bank’s putting up $6 billion in equity. The Swiss central bank would control the new entity and lend it $54 billion.
Gretchen Morgenson contributed reporting.
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