The US government agrees to guarantee about US$300bn of Citi`s troubled assets. It will also inject an additional US$20bn into the beleaguered US bank

The US government has agreed to guarantee about US$300bn of Citigroup’s troubled assets. The Bush administration will also inject an additional US$20bn into the beleaguered US bank, carrying an 8% interest rate for the first few years, the Wall Street Journal (WSJ) reported on Monday.

Citi is looking at putting risky assets in a government-supported “bad bank”, de-linking it’s remaining assets, the WSJ said. The “bad bank” might also take on some of Citi’s over US$1.2 trillion of off-balance sheet assets.

The New York based bank might bear the initial losses on the assets, and the US government might cover losses beyond a particular threshold, the WSJ reported, citing people familiar with the matter. The move will help cleanse Citi’s balance sheet.

Citi and the Bush administration reached an agreement over the troubled US banking major’s bailout after its stock plunged 60% last week amid uncertainty surrounding its financial health. The agreement with Citi came after intense weekend negotiations with the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp.

Citi’s shares fell 60% last week to US$3.77. As of Friday’s close, Citi shares had dipped below US$4 per share, a level not in more than a decade. The stock is down 87% so far this year.

The bank had more than US$2 trillion in assets as of the end of the third quarter and has operations in more than 100 countries. In addition, it has another US$1.23 trillion in entities that aren’t reflected there. Some of those assets are tied to mortgages.

Citi’s executives last week debated options as the company’s share price sank, including merging with another bank or selling off businesses. It also spoke to the regulators, and CEO Vikram Pandit told employees that the bank was strong and had no liquidity problems.

The following are the key provisions of the bailout.

* Treasury will inject an additional US$20bn in capital and will charge a higher interest rate, 8% for the first few years, than charged to dozens of other banks borrowing money under the government’s the US$700bn rescue package approved by Congress in October, according to WSJ.
* The US government agrees to backstop a roughly US$306bn pool of Citi’s troubled asset, including mortgage-backed securities. Citi must absorb the first US$29bn in losses and 10% of anything beyond that. Treasury will absorb the next US$5bn in losses, followed by the FDIC taking on the next US$10bn in losses. Any losses on these assets beyond that level would be taken by the Fed. The guarantees will be for 10 years for residential assets, five year for nonresidential assets.
* Citi will offer the government preferred shares in return for the capital infusion.
* Citi would also agree to work to modify, if possible, troubled mortgages held in the US$300bn pool, using standards created by the FDIC after the collapse of IndyMac Bank.
* The US government must approve all executive compensation, including bonuses.

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