The package contains two principal measures to prop up the bank. First, the Treasury will buy $20 billion of preferred stock under the Troubled Assets Relief Programme (Tarp) at $1,000 per share. Citi will pay the Treasury a dividend of 8%, which will be subject to the same guidelines as the CPP.
Secondly, the government will guarantee a $306 billion portfolio of securities backed by a range of assets, including residential mortgages, commercial real estate and other loans. In return, Citi will issue another $7 billion in preferred stock to the government - $3 billion to the FDIC and $4 billion to the Treasury.
This second initiative envisages Citi absorbing all losses on the portfolio up to $29 billion, and thereafter 10% of any further losses, while the government will shoulder the remaining 90%.
Thanks to the government's guarantee, the risk weighting for assets in the portfolio will be 20%, freeing up a further $16 billion for Citi. This will add to the $20 billion received from the Tarp, while half of the $7 billion raised from issuing preferred stock to the government has been earmarked for capital purposes.
The result should be a substantial boost in liquidity for Citi, which estimates its Tier I capital ratio should rise to 14.8% as it benefits from almost $40 billion in extra capital. Citi will also need to gain government approval for executive compensation plans and pay a dividend of only 1% per quarter on common stock for the next three years. Citi must also implement the FDIC's mortgage modification programme.
The week on Risk.net, July 7-13, 2018Receive this by email