Banking behemoth Citigroup bailed out

Citi, once the world's biggest bank, has been forced to accept a $20bn bail-out from the US government.

by
Last Updated: 31 Aug 2010

Deemed 'too big to fall', Citi has accepted an injection of $20bn in new capital from the US Treasury in return for preferred shares, as well as a guarantee from the US Treasury and the Federal Deposit Insurance Corp for up to $306bn of risky securities and loans on its books.

It's hoped that the radical action, which comes close to nationalising the ailing bank, will bring a confidence boost to Citi, whose share price dropped from $9.36 on Monday to $3.77 by the end of Friday. As one of the US's biggest banks, the official line was that Citi simply could not be allowed to topple, but unlike the bail-out of insurer AIG in September, there won't be a purge of executives.

The rescue plan comes at a price but CEO Vikram Pandit gets to keep his job. Brought in to turn around the bank in January, he spent this year watching Citi's worth plummet as it suffered losses from risky mortgages, commercial property, leveraged loans and collateralised debt obligations.

How the mighty have fallen: two years ago, the bank was worth a staggering $270bn; on Friday it was valued at $20.5bn. 75,000 jobs are to be lost from the bank as it attempts to slim down to get through what will be a very difficult few years. Although Pandit and other executives remain at the helm, the US government will get a say in compensation matters (who could have predicted that this time last year?).

The US government's radical action is being projected as a blueprint for other future bank bailouts - if they are needed - so terms have been kept general. The official message is about promoting financial stability, not punishing executives for having failed, but many pundits are finding the lenient terms of the deal difficult to swallow.

Without the bail-out, however, the risk of the bank's collapse would have been too scary a prospect to consider. We'll have to wait to see whether Citi's rescue plan will deliver the boost in confidence that the NYSE so badly needs, but what's certain is that there will be many - including Pandit - who sighed with relief when the 11th hour deal was brokered.

 

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