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...Didn't the government already rescue Citigroup? True, this is not the first government handout. On Oct. 13, Treasury told Citi and eight other large banks that it would be buying billions of dollars worth of stock in their institutions, the opening move in a mass recapitalization plan for the banking sector. Citi got $25 billion in exchange for preferred shares on which it is to pay 5% interest for five years and then...
...banks, plowing $20 billion of new capital into Citigroup and shouldering up to tens of billions of dollars in losses tied to the bank's soured assets. After a brutal week for Citi - marked by pink slips for tens of thousands of workers and a 60% drop in its stock price - news that the government would step in propelled its shares, which rose 58% from Friday's close. "Equity investors were panicked about the company's viability," says David Trone, who follows Citi at the investment bank Fox-Pitt Kelton. "This takes away the remote possibility that the company could...
...markets. After Citi absorbs the first $29 billion in losses on these securities, the government - first the Treasury Department and then the Federal Deposit Insurance Corporation (FDIC) - will step in and bear 90% of any further losses. In return, the government gets up to $7 billion in preferred Citi stock and the right to buy more shares at $10.61 - not a bargain these days, with Citi trading in the single digits, but perhaps worth more down the road. On top of that, $20 billion from the Treasury's Troubled Asset Relief Program (TARP) will be injected into the company...
...much bad news. Citi stock plummeted, dropping 60% over the course of the week, to $3.77 a share. Meanwhile, other parts of the market confirmed Citi's stressed state. The cost of credit-default swaps that protect investors from losing money on Citi's bonds skyrocketed, signaling a lack of confidence in the bank's ability to survive. Bankruptcy rumors circulated, and fears grew that people doing business with Citi - including its retail banking customers - would pull their money. At that point, regulators felt they had no other option but to step...
Plus, there's market psychology to contend with. The jittery stock market isn't about to calm down anytime soon, and those jitters apply doubly to financial institutions. Moreover, during the past two decades Citi has made some hundred acquisitions, leaving a sprawling company that can be incredibly difficult to understand. "The market lost confidence that Citigroup, which is such a vast organization, had it all under control," says NYU's Smith. "The question is, Does this intervention restore confidence to a market where we're dealing with psychology and not analytics?" In this environment, it probably pays...