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UPDATE 2-Citi eyes putting risky assets in "bad bank"
November 24, 2008 / 2:53 AM / 9 years ago

UPDATE 2-Citi eyes putting risky assets in "bad bank"

(Updates attribution, adds CNBC information, adds analyst comment)

By Dan Wilchins

NEW YORK, Nov 23 (Reuters) - Citigroup Inc (C.N) is looking at putting risky assets in a government-supported “bad bank” -- a step to reassure investors that the rest of its assets were safe, a person briefed on the matter said on Sunday.

The “bad bank” might take on $100 billion of Citigroup’s assets, although that number is still being discussed. Citigroup might bear the initial losses on the assets, and the government might cover losses beyond a particular threshold, the person said.

The U.S. government may take a stake in Citigroup in exchange for taking most of the losses, the New York Times reported.

Citigroup spokesman Mike Hanretta declined to comment.

Talks are still fluid, the person said. CNBC reported that the government’s main priority is to give Citigroup a $10 billion to $20 billion equity infusion, but that would not necessarily preclude other actions to bolster the bank.

Any government infusion would be in addition to the $25 billion that it gave Citigroup in October.

But any “bad bank” plan would be similar to what the $700 billion Troubled Assets Relief Program was set up to do: take over bank assets that were either troubled or likely to be troubled. The TARP, signed into law last month, has since shifted its focus on giving direct capital injections to banks, in part because of difficulties in determining how it would buy assets.

U.S. financial markets are waiting for some sort of Citigroup (C.N) announcement this weekend, analysts said.

“A lot of people are looking for some news by Monday,” said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.

Citigroup’s shares fell 60 percent last week to $3.77 amid concerns about the bank’s loan exposure amid a recession hurting many economies globally.

The bank is not in danger of near-term collapse, people close to Citigroup said on Friday. Depositors are sticking with the bank, as are trading counterparties. The capital ratio that regulators look at most carefully, namely the tier-one capital ratio, is well above minimum required levels.

But a rapid decline in share price can make customers skittish and cut into a bank’s business, wrote analysts at independent research boutique CreditSights on Saturday.

“Unfortunately, we feel like we have seen this movie before,” they added. Lehman Brothers Holdings Inc and Washington Mutual Inc both experienced sharp declines in their shares, followed by an exodus of customers. Lehman eventually filed for bankruptcy, while regulators took over Washington Mutual and sold its assets to JPMorgan Chase & Co. (JPM.N)

A SURPRISE TURN

Citigroup’s executives last week debated options as the company’s share price sank, including merging with another bank or selling off businesses. Citigroup also spoke to the Federal Reserve and the U.S. Treasury about the government making a public statement of support and perhaps even putting additional funds into the bank.

And Chief Executive Vikram Pandit told employees on a conference call last week that the bank was strong and had no liquidity problems.

Giving bad assets to the government could help Citigroup, but would also be a surprise turn, given the difficulties the TARP program ran into in when it tried to buy assets.

“Buying assets, that’s exactly the position the government didn’t want to be in,” said Daniel Alpert, a banker at Westwood Capital.

The Financial Times reported on Sunday that the board was meeting to discuss the bank’s future.

Reporting by Dan Wilchins; Editing by Bernard Orr

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