* Citigroup to issue $27 bln preferred stock, cut dividend
* U.S. to shoulder bulk of potential losses, CEO stays
* Stock soars as much as 72 pct, CDS prices cut in half
(Adds analyst, White House, Alwaleed comments; updates
By Dan Wilchins and Jonathan Stempel
NEW YORK The U.S. rescued Citigroup Inc (C.N),
agreeing to shoulder most losses on about $306 billion of the
bank's risky assets, and inject new capital, bolstering
investor hopes that the government will support big banks as
the economy sinks into recession.
The bailout, announced late Sunday, gives the government
the right to buy an equity stake, and marks its latest effort
to contain a widening financial crisis that has already brought
down Bear Stearns Cos, Lehman Brothers Holdings Inc LEHMQ.PK
and Washington Mutual Inc WAMUQ.PK.
U.S. President George W. Bush called the bailout necessary
"to safeguard our financial system," and said the government
would, "if need be," make similar decisions in the future.
Shares of Citigroup rose 58 percent on Monday. The price of
insuring Citigroup bonds against default fell by half.
"All in all, these actions should settle market jitters
surrounding the company for now," CreditSights Inc analyst
David Hendler wrote.
The bailout could also boost investor confidence in the
largest U.S. banks, which are expected to suffer billions of
dollars in credit losses in the coming quarters.
"The government is trying to restore trust to the financial
system. There are big banks that are central to the economy
that the government will support," said Thomas Russo, portfolio
manager at Gardner Russo & Gardner, which does not own
Bank of America Corp (BAC.N) rose 27.2 percent to $14.59,
JPMorgan Chase & Co (JPM.N) advanced 21.4 percent to $27.58,
and Wells Fargo & Co (WFC.N) rose 20 percent to $26.02, all on
The package gives Chief Executive Vikram Pandit more time
to shed assets, slash payroll and boost efficiency after
soaring losses from toxic debt led to $20.3 billion in losses
in the last year. Analysts expect billion of dollars of further
losses. Pandit became CEO in December.
Pandit "deserves a vote of confidence," Saudi Prince
Alwaleed bin Talal, Citigroup's largest individual investor,
told CNBC television. "I am personally committed to Citigroup.
No doubt about that." Alwaleed agreed last week to increase his
Citigroup stake to 5 percent from less than 4 percent.
The stock rose $2.18, or 58 percent, to close at $5.95 on
the New York Stock Exchange, where it jumped as high as $6.50.
The annual cost to insure $10 million of Citigroup debt against
default for five years fell to about $240,000 from $500,000.
Still, not every investor was as gung-ho on the decision to
let Pandit keep his job.
"You're seeing an inept management team being rewarded by
the U.S. government," said William Smith, whose Smith Asset
Management in New York has seen its Citigroup stock plunge in
value over the years.
Citigroup received the latest government infusion, which
includes a $20 billion capital injection, after its shares
plunged 60 percent last week amid growing concern it would need
large amounts of capital to survive the recession. and less
than a week after it set plans to slash 52,000 jobs, leaving it
with 300,000 employees.
The $20 billion of government capital comes after the U.S.
injected $25 billion last month. In this round, the government
is buying preferred stock that will pay an 8 percent dividend.
In exchange for the bailout, Citigroup slashed its
quarterly dividend to a penny per share from 16 cents. It
cannot raise the payout for three years without U.S. consent.
Even so, taxpayers are now on the hook for nearly $250
billion in potential losses in the $306 billion portfolio,
including commercial real estate loans, leveraged loans, and
other assets, representing 15 percent of Citigroup's $2.05
trillion balance sheet.
Citigroup will absorb the first $29 billion in losses on
the $306 billion portfolio, plus 10 percent of additional
losses, for a maximum total exposure of $56.7 billion. The
Treasury Department, the Federal Deposit Insurance Corp and the
Federal Reserve would absorb the rest.
In return, Treasury and the FDIC will get $27 billion in
preferred shares, of which $7 billion are a fee that Citigroup
pays in exchange for the government guarantee.
The government is also getting warrants to buy $2.7 billion
in Citigroup common stock at $10.61 per share for a potential
stake of about 4.5 percent. That's on top of the roughly 3.3
percent the government is entitled to buy under a previous
"To stabilize the equity, we had to put behind us the issue
of Citigroup's ability to withstand whatever would come," Chief
Financial Officer Gary Crittenden said in an interview on
Citigroup estimated the injection will give it a Tier 1
capital ratio of 14.8 percent, more than twice what the
government requires. The government also increased Citigroup's
access to the Fed's discount window, adding liquidity.
The Fed, the Treasury Department and the FDIC called the
actions "necessary to strengthen the financial system and
protect U.S. taxpayers and the U.S. economy."
Citigroup has one of the farthest international reaches of
any U.S. bank, with operations in more than 100 countries.
Investors have long speculated the government deemed it too big
to fail because a collapse could cause global financial havoc.
The government package may become a template for other U.S.
banks expected to face growing losses as the economy contracts.
Losses once concentrated in mortgages are bleeding into other
areas such as credit cards and commercial real estate.
The rescue magnifies the U.S. government's burden following
bailouts of insurer American International Group Inc (AIG.N),
Bear Stearns and mortgage finance giants Fannie Mae FNM.N and
Freddie Mac FRE.N. Treasury also has injected more than $300
billion into banks and other financial institutions.
Already, more than $1 trillion of taxpayer money is at
risk, and the Big Three automakers are seeking $25 billion more
to avert bankruptcy. President-elect Barack Obama may also seek
up to $700 billion for economic stimulus.
Earlier this month, U.S. Treasury Secretary Henry Paulson
said a $700 billion industry rescue package to soak up toxic
assets from troubled banks, like Citigroup, will instead only
be used to inject capital into banks.
That decision sent mortgage and other debt markets into a
The bank's market value on Friday was just $20.5 billion,
down from more than $270 billion two years ago -- and even
below the $25 billion initial U.S. capital injection.
(Additional reporting by Glenn Somerville in Washington,
and Joseph A. Giannone and Jonathan Spicer in New York, editing
by Steve Orlofsky and Jeffrey Benkoe)