Treasury bolsters Citigroup with capital
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The U.S. government on Sunday entered into an agreement with Citigroup to bolster the company with $20 billion in capital from the TARP pool. The treasury has also announced that it, along with FDIC, will provide protection against an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC.
The stock markets cheered the news and the markets are up today. The Dow is up 4.5% and trading at 8400. Citigroup shares soared 50% and was trading at $5.73 after the news. Citigroup had to slash its quarterly dividend to a penny per share from 16 cents and it cannot raise the dividend for three years without U.S. consent according to the agreement with the US grovernment.
US taxpayers on the other hand are stuck with insuring more bad mortages at these financial companies as the government bails out more ailing firms. Not rescuing a company like Citigroup can have catastrophic consequences to the health of the economy, which is just getting used to the fact that some of the big names like Lehman Brothers, Bear Sterns, Merrill Lynch etc. are no more.
President elect Obama has meanwhile announced his treasury secretary, New York Federal Reserve President Timothy Geithner, and his economic team, which has a tough challenge ahead. “The economy is likely to get worse before it gets better” Obama said, taking a cautious and prudent stand with the current state of the economy.
