CMKX --- CMKM Diamonds Inc --- ***Citigroup Rescue***

Bloomberg.com
Citigroup Gets U.S. Rescue From Losses, Cash Infusion (Update2)

By Bradley Keoun

Nov. 24 (Bloomberg) -- Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.

The second-biggest U.S. bank by assets surged as much as 72 percent in New York trading after the Treasury, Federal Reserve and Federal Deposit Insurance Corp. announced the aid plan yesterday. In return for the cash and guarantees, the government gets $27 billion of preferred shares paying an 8 percent dividend and warrants equivalent to a 4.5 percent stake in the company.

The regulators stepped in to protect Citigroup from losses on $306 billion of troubled U.S. home loans, commercial mortgages, subprime bonds and low-grade corporate loans when the firm’s tumbling shares sparked concern that depositors might pull their money, destabilizing a company that operates in more than 100 countries. The $20 billion of new cash adds to a $25 billion infusion the bank, led by Chief Executive Officer Vikram Pandit, collected last month under a Congressional bailout program.

“It really was a must-do thing,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $85 billion. “If they’d let Citigroup go, that would’ve been disastrous.”

Citigroup’s stock dropped below $5 last week for the first time since 1994, vexing government officials who in the past three months have pumped $250 billion into U.S. banks, expanded the Fed’s last-resort lending programs by more than $1 trillion and bailed out insurer American International Group Inc. and mortgage finance companies Fannie Mae and Freddie Mac.

Dividend Cut

The shares, which closed last week at a 15-year-low of $3.77, today surged 52 percent to $5.73 as of 2:45 p.m. in New York Stock Exchange composite trading. The stock remains 89 percent off the record $55.70 reached in December 2006.

The cost of the new preferred shares will reduce earnings left over for common shareholders, Morgan Stanley analysts Betsy Graseck and Cheryl Pate wrote today in a report. Under the terms of the deal with the government, Citigroup also has to slash its quarterly shareholder dividend to 1 cent from 16 cents.

Over the longer term, Citigroup’s stock price will appreciate because of “the reduction in ‘tail risk,’” or the chance that losses might be become so heavy the bank can’t sustain them, they said.

“For the foreseeable future, Citi has oxygen,” Royal Bank of Scotland Group Plc analyst Tom Jenkins wrote today in a report.

Losing Streak

Pandit, who has been unable to snap a four-quarter streak of net losses totaling $20 billion since he took the lead at the company in December 2007, said the agreement addresses “market confidence and the recent decline in Citi’s stock.”

“What we really needed to do was completely put behind us the issue of whether Citi would be able to cover the losses that it has out of the capital base that it has,” Chief Financial Officer Gary Crittenden said in an interview. “Under virtually any circumstance that is reasonable, Citi has the ability now.”

The asset guarantees and capital infusion will boost Citigroup’s Tier 1 ratio -- a gauge of the bank’s ability to withstand loan losses -- to 14.8 percent, from 8.19 percent at the end of September. A bank needs a 6 percent Tier 1 ratio to meet the regulatory requirements for “well-capitalized” status, and Citigroup has at least $100 billion more capital than it needs to reach that threshold, Crittenden said.

Vanishing Value

“Today’s government actions seem to ensure its survival,” Sandler O’Neill & Partners LP analyst Jeff Harte wrote today in a report.

Former Chairman Sanford “Sandy” Weill, 75, built Citigroup through more than 100 acquisitions during his 17 years at the helm. The company pioneered the “financial supermarket” concept, offering services including branch banking, trading, investment-banking, credit cards, mortgage lending and transaction processing.

Citigroup’s market value, which at $274 billion at the end of 2006 was bigger than any of its U.S. rivals, has since slumped to $31 billion, ranking No. 6 behind JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., U.S. Bancorp and Bank of New York Mellon Corp.

Addressing employees last week, Pandit, 51, said he wanted to stick with the bank’s business strategy and avoid selling “core businesses” including the Smith Barney brokerage. Crittenden, 55, said in the interview that the stabilization deal with the government will allow investors to “look through to the earnings potential of the franchise.”

‘Stronger Hands’

Investors and Citigroup’s rivals may think differently.

“We should be thinking about breaking this company up and redistributing the assets into stronger hands,” Christopher Whalen of Institutional Risk Analytics, a Torrance, California- based research firm, said in a Bloomberg Radio interview.

Under the asset guarantees, Citigroup will cover the first $29 billion of pretax losses on the $306 billion asset pool, in addition to any reserves it already has set aside. After that, the government covers 90 percent of the losses, with Citigroup covering the rest. In addition to the mortgages, the guarantees cover U.S.-originated “structured investment vehicles,” which already this year have stuck the bank with $3.3 billion of writedowns.

The warrants accompanying the preferred shares give the government the right to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment. When combined with the warrants that came with last month’s injection under the Troubled Asset Relief Program, the Treasury would have an 8 percent stake in Citigroup.

Pandit’s Job

The deal is designed to “strengthen the financial system and protect U.S. taxpayers,” according to the statement from the three agencies.

In a departure from terms of the AIG, Fannie Mae and Freddie Mac bailouts, no management changes were required and Pandit gets to keep his job, government officials said. The government will have a say over executive compensation at Citigroup.

The bank still may end up “controlled by the government,” said Whalen, of Institutional Risk Analytics. In an interview with Bloomberg television, Crittenden said he was “quite confident that we will stay out of the government’s hand.”

Prince, Alwaleed

Pandit, a former Morgan Stanley banker, was picked to succeed Charles O. “Chuck” Prince five months after joining the bank as head of hedge-fund and private-equity investments. In May of this year, he announced a plan to rid the bank of more than $400 billion of its worst “legacy assets” -- many of them accumulated through an expansion in subprime mortgages and asset- backed lending during Prince’s four-year tenure.

As the stock tumbled last week, Pandit announced a plan to eliminate 52,000 jobs and cut costs by about $2 billion per quarter. He and three top deputies bought 1.3 million shares in a show of confidence, and Prince Alwaleed bin Talal, one of the bank’s biggest investors, said he would boost his stake to about 5 percent from 4 percent.

The stock kept plunging, and the bank’s board called an emergency meeting on Nov. 21 to discuss its options. The frenzied weekend of discussions with the Fed and Treasury were reminiscent of those that took place when Bear Stearns Cos. collapsed in March and Lehman Brothers Holdings Inc. descended into bankruptcy in September.

Loan Losses

“The lack of confidence in Citi’s stock price required the government to help stem the tide in order to avoid systemic risk over the weekend, which was not enough of a window for any serious bidders for a major takeover or segment sale,” CreditSights Inc. analyst David Hendler wrote today in a report. “These actions should settle market jitters surrounding the company for now.”

Alwaleed, in an interview today on CNBC, laid the blame for Citigroup’s troubles at the feet of Prince, and said he has “full confidence” in Pandit.

“You can never judge a CEO with this short tenure,” Alwaleed said. “Vikram should be given more time.”

Citigroup remains vulnerable to losses on loans and securities outside the U.S., said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees $8 billion and holds Citigroup shares. The bank also is keeping its credit-card and consumer-finance loans, where delinquencies also have surged.

The government plan “gives them a little bit of breathing room, but longer term, things may deteriorate and losses increase,” said Kovalski. “The Achilles heel with Citi is their exposure to emerging markets and what’s going to happen when emerging markets turn down, as they’re doing now.”

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net;

Last Updated: November 24, 2008 14:49 EST