MW: Citi soars after U.S. steps in to backstop losses
Bailout includes government approval of compensation, limits on dividends
NEW YORK (MarketWatch) - Citigroup shares jumped by more than 50% Monday morning after the U.S. government agreed to rescue the nation's once largest bank and the pioneer of the one-stop-shop for business and consumer financial services in an eleventh-hour, $326 billion plan to avoid financial collapse.
The government agreed to invest $20 billion in Citi and to guarantee as much as $306 billion of Citi's troubled assets in a deal reached Sunday. The deal also gives the government control of executive bonuses, and limits dividend payments.
"The U.S. government's creative ring fencing of Citi's $306 billion in troubled assets is a strong positive for the system and for Citi shareholders," Morgan Stanley analyst Betsey Graseck wrote in an early Monday morning research note.
The agreement with Citi , whose stock had dropped more than 60% in the past week to a 16-year low, and which had lost $160 billion of market capitalization in the past year, came after intense weekend negotiations with the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., according to media reports.
The move came as federal and company officials desperately sought to avoid a replay of the disastrous failure and subsequent bankruptcy of Lehman Bros. earlier this year. Many credit that event as the tipping point between dangerous market and economic conditions into a market crash and a potential depression.
"The U.S. government is lowering risk while not significantly diluting shareholders, keeping them engaged in the sector," Graseck told clients.
Citi shares rose 55%, to $5.85 in active pre-open trading Monday. More than 24 million shares of Citi were traded in the pre-open session about 90 minutes before the market officially opens.
Complicated plan to save Citi
Citi "reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity," Chief Executive Vikram S. Pandit said in a statement on Monday. Citi's board approved the terms.
This is the first time the government has absorbed bad assets rather than inject money directly into financials. It's also similar to a plan the Swiss government has reached with UBS.
