Last night, the FDIC, Federal Reserve and Treasury issued a joint statement announcing a rescue package for Citigroup consisting of an injection of $20 billion of fresh capital and a stop-loss guarantee on a $306 billion asset pool. The stop loss guarantee bears a strong resemblance to the loss-guarantee arrangement that was a central feature of Citigroup’s proposed open-bank FDIC-assisted acquisition of Wachovia’s banking operations, but there are some important differences.
The specific terms of the rescue package are set forth in a term sheet, but the principal components of the rescue package are the following:
- Treasury will purchase, under the Troubled Asset Relief Program (TARP), as authorized under the Emergency Economic Stabilization Act (EESA), $20 billion of newly issued Citigroup preferred stock, which will generally have the same terms as the $25 billion of Citigroup preferred stock that Treasury purchased under the Capital Purchase Program (CPP), except that the new preferred stock will be entitled to 8% cumulative dividends, rather than 5% (rising to 9%) for the CPP preferred stock.
- The FDIC, Treasury and the Federal Reserve will provide a stop-loss guarantee on a $306 billion pool of “securities, loans, and commitments backed by residential and commercial real estate and other assets.” Citigroup would absorb the first $29 billion of losses (in addition to existing reserves) and 10% of all losses thereafter, with the U.S. government absorbing the remaining 90% of any losses. The first $5 billion of U.S. government losses would be funded by Treasury under its TARP authority, and the next $10 billion of losses would be funded by the FDIC. The Federal Reserve would effectively absorb any remaining losses – that is, losses to be borne by the federal government after the $15 billion from Treasury and the FDIC is exhausted – by financing the remainder of the asset pool on a non-recourse basis (other than Citigroup’s 10% loss sharing participation and recourse for interest payments) at a floating rate equal to the overnight index swap (OIS) rate plus 300 basis points. The guarantees will be for 10 years on residential assets and five years on non-residential assets.
- In exchange for the asset pool guarantee, Citigroup will issue an additional $7 billion of preferred stock, $4 billion of which would be issued to Treasury and $3 billion to the FDIC. This preferred stock will have the same terms as the $20 billion of TARP preferred stock described above.
- Citigroup will be prohibited from paying common stock dividends above $.01 per share per quarter for three years, and Citigroup must submit for Treasury’s approval an “executive compensation plan, including bonuses, that rewards long-term performance and profitability, with appropriate limitations.”
- Citigroup will retain the income from the guaranteed assets, but will also be required to use a “template” to manage the guaranteed assets. The “template will include the use of mortgage modification procedures adopted by the FDIC, unless otherwise agreed,” which would appear to refer to the Loan Modification Program Guide that the FDIC released on Thursday, which differs in some important respects from the mortgage modification programs that the FDIC has implemented in connection with the IndyMac receivership and U.S. Bank’s acquisition of Downey and PFF.
- Citigroup will issue to Treasury a warrant to purchase a number of Citigroup common shares having an aggregate exercise price equal to $2.7 billion (10% of the $27 billion of preferred stock issued to Treasury and the FDIC). The exercise price for the warrants will be $10.61 (Citigroup’s 20-day trailing average closing price), which far exceeds its $3.77 closing price on Friday.
According to Citigroup, this governmental support will generate approximately $40 billion of capital benefits, consisting of:
- $20 billion of capital from the TARP preferred investment
- $3.5 billion of capital from the $7 billion of preferred stock that can be recognized as capital
- $16 billion of additional capital for risk-based purposes resulting from the asset guarantee (the guaranteed assets will be entitled to a 20% risk weighting as a result of the asset guarantee).
In addition, Citigroup stated that it “has been provided expanded access to both the Federal Reserve's Primary Dealer Credit Facility and the discount window, resulting in strong additional liquidity resources should they be needed.” Citigroup also stated that it “has access to the yet-unused Federal Reserve's Commercial Paper Funding Facility and intends to issue debt under the FDIC's Temporary Liquidity Guarantee Program.”
While the Citigroup package draws on what are by now well-established financial rescue tools of Treasury and the Federal Reserve, it is a significant new development for the FDIC’s use of open bank assistance. The FDIC appears not to have applied two historical prerequisites for such assistance: it has not diluted the Citigroup shareholders to a nominal amount, and it has not required the replacement of senior management. Both events are described in the FDIC’s Resolution Handbook, and both probably would have occurred if Citigroup’s assisted purchase and assumption of Wachovia’s banking assets and liabilities had taken place.