Citi gets sweeping safety net, Pandit dodges bullet (Lead)

November 24th, 2008 - 9:08 pm ICT by IANS  

Barack ObamaWashington, Nov 24 (IANS) As US government regulators approved a radical plan to stabilise Citigroup, there was no indication that they would seek to replace the struggling banking giant’s Indian American chief executive Vikram Pandit.Pandit met Citigroup’s board and also spoke to regulators and lawmakers as officials worked on the massive rescue package by which the government could soak up tens of billions of dollars in Citigroup losses.

But despite the massive rescue effort, regulators did not push for a management change at Citigroup, CNN reported.

In recent days, there had been speculation that Pandit could step down. There had also been talk that Citigroup was considering replacing chairman Sir Win Bischoff, although the company denied such reports.

The government plan announced Sunday night appeared to have the intended effect as the Citigroup shares, which had plunged in the past week, rose 33 percent in pre-market trading Monday.

“With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,” Treasury, Federal Reserve and the federal Deposit Insurance Corporation (FDIC) said in a joint statement.

Federal Reserve Chairman Ben Bernanke and Timothy Geithner, president of the New York Fed, were both involved in the weekend talks over Citigroup’s fate, according to government officials.

Geithner is expected to be nominated to be treasury secretary by president-elect Barack Obama.

The plan has two key features:

First, the US Treasury and the FDIC will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an eight percent dividend on those shares.

In addition, the government will get warrants, or the right to purchase $2.7 billion worth Citigroup shares in the future.

The government will impose restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share for the next three years and will face limits on executive compensation.

Plus, Citigroup will be expected to adjust mortgages for troubled borrowers, using procedures similar to those the FDIC implemented at IndyMac, which it took over last summer.

Under the terms of the Citigroup rescue package, the bank would be on the hook for the first $29 billion in losses on the covered assets, which include mostly loans backed by residential and commercial mortgages. It would cover 10 percent of losses above that amount, with the government shouldering the rest.

Citigroup has been one of the hardest hit financial firms since the mortgage market started to unravel late last year. Over the past four quarters, the company has recorded close to $21 billion in losses.

There had been concerns that letting another major financial institution fail would have disastrous consequences for both the US economy as well as the global financial system.

The bank had more than $2 trillion in assets as of the end of the third quarter and has operations in more than 100 countries.

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