C - Hope you have some share left - Ahead of the Bell: Citigroup gets bailout
Monday November 24, 7:48 am ET
Citigroup receives fresh aid from government in effort to stabilize the bank
NEW YORK (AP) -- Citigroup Inc. shares looked to rebound Monday, a day after the government agreed to provide the bank a lifeline by investing an additional $20 billion in the company and offering to help it cover hundreds of billions of dollars of potential losses.
Citi shares jumped $1.93, or 51.2 percent, to $5.70 in premarket trading. Shares of Citi were pummeled throughout the past week as investors became increasingly nervous about the New York-based bank's loan portfolio and potential losses from those lending operations.
Its shares fell 60 percent last week, and are down 87 percent for the year.
Late Sunday, the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., announced a plan to help Citi avoid the fate of other financial firms felled by the ongoing credit crisis.
The Treasury Department will provide Citi with an additional $20 billion, on top of an earlier investment of $25 billion. That cash will come from the government's $700 billion bank investment program aimed at providing relief for banks and in an effort to spur lending amid the economic downturn.
The Treasury and FDIC will also help guarantee potential losses on up to $306 billion of risky loans and securities backed by mortgages held by Citi. Under the agreement, Citi will assume the first $29 billion in losses on the assets. After that, the government will absorb 90 percent of the remaining losses, with Citi shouldering the other 10 percent.
Money from the $700 billion government investment program and from the FDIC would help cover those potential losses.
In exchange for the support, the government will receive $7 billion in preferred shares of Citi. Citi will also have to cut its dividend to 1 cent per share, from 16 cents per share. Executive compensation will also be restricted under the agreement.
Citigroup has been among the hardest hit banks by the downturn in the mortgage and credit markets. The bank has posted four consecutive quarterly losses, including a loss of $2.8 billion during the third quarter.
Analysts widely expect Citi to post a loss during the fourth quarter as well. Analysts polled by Thomson Reuters, on average, forecast Citi will lose 21 cents per share during the quarter ending Dec. 31.
The bank has been hit hard by losses in its mortgage portfolio and on bonds backed by troubled loans. As mortgages have increasingly defaulted since the middle of 2007, investors have shied away from purchasing all but the safest forms of debt. That has led to a sharp decline in the value of bonds backed by the troubled loans. Citi has already taken more than $40 billion in write-downs on its investments since the turmoil began.
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