Daiyushaw’s Blog

Citi has been rescued

November 24, 2008 at 9:59 pm (Uncategorized)

Federal regulators announced late Sunday night that the government had approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank. President Bush said on Monday that more such rescues could be arranged if they became necessary.

Just before midnight on Sunday, calls for Citi to absorb the first $29bn in losses it sustains from its portfolio of risky assets – from residential mortgages to commercial real estate and leveraged loans, collateralised debt obligations and auction rate securities. Federal government entities will stand behind 90 per cent of the remaining losses, which could amount to $249bn.

The cost of insuring Citi’s debt almost halved on Monday as the rescue package was seen to lessen the risk of default. Its five-year credit default swap tightened from close to 500 basis points on Friday to 255bp, or $255,000 a year to protect $10m of debt.

Under the terms of the arrangement, the US Treasury will invest $20bn in Citi preferred stock under the federal government’s troubled asset relief programme (Tarp) and receive dividends at a rate of 8 per cent annually. On top of that amount, Citi is receiving an additional $7bn in return for preferred shares issued to both the Treasury and the Federal Deposit Insurance Corporation for their roles in guaranteeing the risky assets.