The US government has agreed to a $306 billion (€242 billion) rescue plan for Citigroup, agreeing to shoulder some losses from toxic debt in the latest attempt to bolster a financial services industry in turmoil. The move comes after the banking giant saw its shares plunged by more than 60 per cent last week.
Citigroup's package may also prove a template for other banks that are expected to face growing losses as economies worldwide sink into recession.
Credit losses once concentrated in mortgages are already bleeding into new, large areas such as credit cards and commercial real estate.
Citigroup has the farthest international reach of any US bank, with operations in more than 100 countries, including Ireland.
The plan announced late last night calls for Citigroup to obtain $27 billion of capital by issuing preferred shares. The shares carry an initial 8 percent dividend, higher than the 5 percent it charges dozens of other lenders under its $700 billion financial industry rescue package. Citigroup itself got $25 billion in the earlier package.
Citigroup agreed to absorb the first $29 billion of losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. The Treasury Department could end up absorbing $5 billion, the Federal Deposit Insurance Corp $10 billion, and the Federal Reserve the rest.
The bank will not have to make management changes, but agreed to tighter restrictions on executive pay, and to try to modify troubled mortgages in the $306 billion portfolio. It also cannot pay more than 1 cent per share in common stock dividends per quarter for three years without the Treasury Department's consent. The quarterly dividend is now 16 cents.
"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 Fed, the Treasury Department and the FDIC said in a joint statement.
The rescue package is the biggest bank bailout to date and a measure of the crisis sweeping the world.
The Gulf emirate of Dubai, home to a new luxury mega-resort built on a manmade palm-shaped island visible from space, announced it was reining in a building spree symbolic of extravagant boom years leading up to the current crisis.
The United Arab Emirates began to bail out Dubai's lenders and consolidate its financial sector.
Concerns Europe has entered a deep recession that could last well into next year were reinforced when a key survey of German corporate sentiment hit its lowest level in nearly 16 years in November.
French President Nicolas Sarkozy said after talks with German Chancellor Angela Merkel their "determination to help European industry and notably the automobile industry is total."
The Citigroup intervention had been widely expected in some form, but Asian markets trimmed losses, while European stocks rose 4 percent on news the US Treasury would not allow the number two U.S. bank to fail in the way of rival Lehman Brothers.
The plan was announced less than a week after Pandit announced plans to reduce Citigroup's workforce to 300,000 by early next year from 375,000 at the end of 2007.
REUTERS