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Extraordinary Financial Assistance
Provided to Citigroup, Inc.

SIGTARP 11-002

January 13, 2011

Office of the special inspector general

For the Troubled Asset Relief Program
1801 L Street, NW
Washington, D.C. 20220

January 13, 2011

MEMORANDUM FOR:

The Honorable Timothy F. Geithner, Secretary of the Treasury
The Honorable John Walsh, Acting Comptroller of the Currency
The Honorable Sheila C. Bair, Chairman, Board of Directors of the
Federal Deposit Insurance Corporation
The Honorable Ben Bernanke, Chairman, Board of Governors of
the Federal Reserve System

FROM:

Neil M. Barofsky – Special Inspector General for the Troubled
Asset Relief Program

SUBJECT:

Extraordinary Financial Assistance Provided to Citigroup, Inc.
(SIGTARP-11-002)

We are providing this audit report for your information and use. It discusses the basis for the
decision to provide Citigroup, Inc. (“Citigroup”) with additional Government assistance under
the Targeted Investment Program (“TIP”) and Asset Guarantee Program (“AGP”); how the AGP
asset pool was determined; and the basis for the decision to permit Citigroup to terminate the
AGP and repay its TIP capital infusion. The Office of the Special Inspector General for the
Troubled Asset Relief Program conducted this audit under the authority of Public Law 110-343,
as amended, which also incorporates the duties and responsibilities of inspectors general of the
Inspector General Act of 1978, as amended.
The Department of the Treasury and the Federal Deposit Insurance Corporation provided us
formal written comments to the draft of this report. The comments are addressed in the report,
where applicable, and copies of the agencies’ responses to the audit are included in the
Management Comments section of this report, in Appendix L.
We appreciate the courtesies extended to our staff. For additional information on this report,
please contact Mr. Kurt Hyde (kurt.hyde@do.treas.gov / 202-622-4633), or Mr. Clayton Boyce
(clayton.boyce@do.treas.gov / 202-622-9257).

SIGTARP 11-002

January 13, 2011

SIGTARP
Office of the Special Inspector General
for the Troubled Asset Relief Program

January 13, 2011

Extraordinary Financial Assistance Provided to Citigroup, Inc.
Summary of Report: SIGTARP-11-002

Why SIGTARP Did This Study
On October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (“EESA”) created the
Troubled Asset Relief Program (“TARP”) and
provided the Secretary of the Treasury with the
authority and facilities to restore liquidity and
stability to the U.S. financial system. Section 102 of
EESA required that if the Treasury Secretary
established an asset purchase program, a program
must also be established to guarantee troubled assets.
At the time of enactment of EESA, Citigroup, Inc.
(“Citigroup”) was one of the largest financial
institutions in the world. On October 28, 2008, the
Department of the Treasury (“Treasury”) announced
Citigroup and eight other financial institutions as the
first recipients of TARP funds through the Capital
Purchase Program (“CPP”), which was intended, in
part, to “encourage U.S. financial institutions to build
capital to increase the flow of financing to U.S.
business and consumers and to support the U.S.
economy.” This program provided Citigroup $25
billion – the maximum amount that Treasury said it
would invest in any one institution under CPP.
However, Citigroup suffered significant instability
shortly after receiving the initial $25 billion TARP
investment. On November 23, 2008, Treasury, the
Federal Reserve Board (“FRB”), and the Federal
Deposit Insurance Corporation (“FDIC”) announced
a package of transactions intended to reduce the risk
of Citigroup failing and dragging down the rest of
the financial system with it. As part of the package,
the Government said that it would provide
guarantees in connection with a Citigroup asset pool
of up to $306 billion (that number was later adjusted
to $301 billion). The announcement also promised
Citigroup an additional $20 billion in TARP funds in
return for additional shares of preferred stock and
warrants. On January 2, 2009, Treasury gave titles to
these already announced assistance transactions: the
asset pool was named the Asset Guarantee Program
(“AGP”) and the additional capital assistance was
named the Targeted Investment Program (“TIP”).
As part of SIGTARP’s continuing oversight of
TARP, and to respond to a request from former
Congressman Alan Grayson, SIGTARP performed a
review of the U.S. Government’s decision to provide
additional funding and asset guarantees to Citigroup.
SIGTARP’s reporting objectives for this audit were
to determine: (1) the basis for the decision to provide
Citigroup with additional Government assistance;
(2) how the asset guarantee pool was determined;
and (3) the basis for the decision to permit Citigroup
to terminate its AGP agreement and repay TIP.

What SIGTARP Found
In November 2008, worried that Citigroup would fail absent a strong statement of
support from the U.S. Government, and that such failure could cause catastrophic
damage to the economy, federal officials decided to rescue one of the largest
financial institutions in the world. Late on November 23, 2008, following a frantic
few days dubbed “Citi Weekend,” Citigroup agreed to a Government proposal that
would provide Citigroup asset guarantees and a $20 billion capital infusion in
exchange for preferred shares of Citigroup stock. The essential purpose of the deal,
as then-Treasury Secretary Henry Paulson and then-Federal Reserve Bank of New
York President Timothy F. Geithner later confirmed to SIGTARP, was to assure the
world that the Government was not going to let Citigroup fail.
SIGTARP found that the Government constructed a plan that not only achieved the
primary goal of restoring market confidence in Citigroup, but also carefully
controlled the risk of Government loss on the asset guarantee. The Government
summarily rejected Citigroup’s initial proposal and made a take-it-or-leave-it offer
that Citigroup only reluctantly accepted, against the advice of Citigroup insiders who
considered the Government’s terms too expensive in light of the assistance provided.
In the end, Citigroup accepted the deal chiefly because of its expected impact on the
market’s perception of Citigroup’s viability.
After the deal was announced, that impact was immediate: Citigroup’s stock price
stabilized, its access to credit improved, and the cost of insuring its debt declined.
And while the transactions hardly solved all of Citigroup’s problems – just months
later the Government was compelled to significantly restructure its ownership
interest in a manner that left it as Citigroup’s single largest common stockholder –
the Government incurred no losses, and even profited on its overall investment in
Citigroup by more than $12 billion.
Nevertheless, two aspects of the Citigroup rescue bear noting.
First, the conclusion of the various Government actors that Citigroup had to be saved
was strikingly ad hoc. While there was consensus that Citigroup was too
systemically significant to be allowed to fail, that consensus appeared to be based as
much on gut instinct and fear of the unknown as on objective criteria. Given the
urgent nature of the crisis surrounding Citigroup, the ad hoc character of the systemic
risk determination is not surprising, and SIGTARP found no evidence that the
determination was incorrect.
Nevertheless, the absence of objective criteria for reaching such a conclusion raised
concerns about whether systemic risk determinations were being made fairly and
with consistent criteria. Such concerns could be addressed at least in part by the
development, in advance of the next crisis, of clear, objective criteria and a detailed
road map as to how those criteria should be applied. Treasury Secretary Timothy F.
Geithner told SIGTARP that he believed creating effective, purely objective criteria
for evaluating systemic risk is not possible, saying “it depends too much on the state
of the world at the time. You won’t be able to make a judgment about what’s
systemic and what’s not until you know the nature of the shock” the economy is
undergoing. He also said that whatever objective criteria were developed in advance,
markets and institutions would adjust and “migrate around them.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank
Act”) charged the Financial Stability Oversight Council (“FSOC”) with
responsibility for developing the specific criteria and analytical framework for
assessing systemic significance. That process is under way.

SIGTARP
Office of the Special Inspector General
for the Troubled Asset Relief Program

Treasury provided an official written response
to this audit report in a letter dated January 12,
2011, which is reproduced in full in Appendix
L. Treasury’s response broadly concurred with
the report. FDIC provided an official written
response to this audit report in a letter dated
January 12, 2011. FDIC’s letter offers four
“clarifications” to the report. While SIGTARP
has not incorporated FDIC’s suggested changes,
the letter is reproduced in full in Appendix L.
FRB stated that it intends to provide an official
written response in the near future, a copy of
which, if available, will be included in
SIGTARP’s upcoming Quarterly Report and
will be added to the online version of this audit
report. OCC stated that it would not be
providing a formal response.

SIGTARP remains convinced that even if some aspects of systemic significance are
necessarily subjective and dependent on the nature of the crisis at the time, an
emphasis on the development of clear, objective criteria in advance of the next crisis
would significantly aid decision makers burdened by enormous responsibility,
extreme time pressure, and uncertain information. It is also imperative that FSOC not
simply accept the adaptability of Wall Street firms to work around regulation, but
instead maintain the flexibility to respond in kind.
Second, the Government’s actions with respect to Citigroup undoubtedly contributed
to the increased moral hazard that has been a direct byproduct of TARP. While the
year-plus of Government dependence left Citigroup a stronger institution than it had
been, it remained, and arguably still remains, an institution that is too big, too
interconnected, and too essential to the global financial system to be allowed to fail.
When the Government assured the world in 2008 that it would not let Citigroup fail, it
did more than reassure troubled markets – it encouraged high-risk behavior by
insulating risk takers from the consequences of failure.
Unless and until institutions like Citigroup can be left to suffer the full consequences
of their own folly, the prospect of more bailouts will potentially fuel more bad
behavior with potentially disastrous results. Notwithstanding the passage of the
Dodd-Frank Act, which does give FDIC new resolution authority for financial
companies deemed systemically significant, the market still gives the largest financial
institutions an advantage over their smaller counterparts by enabling them to raise
funds more cheaply, and enjoy enhanced credit ratings based on the assumption that
the Government remains as a backstop. And because of the prospect of another
Government bailout, executives at such institutions might be motivated to take greater
risks than they otherwise would.
The Dodd-Frank Act was intended in part to address the problem of
institutions that are “too big to fail.” Whether it will successfully address the
moral hazard effects of TARP remains to be seen, and there is much
important work left to be done. As Secretary Geithner told SIGTARP, while
the Dodd-Frank Act gives the Government “better tools,” and reduced the
risk of failures, “[i]n the future we may have to do exceptional things again”
if the shock to the financial system is sufficiently large. Secretary Geithner’s
candor about the prospect of having to “do exceptional things again” in such
an unknowable future crisis is commendable. At the same time, it
underscores a TARP legacy, the moral hazard associated with the continued
existence of institutions that remain “too big to fail.” It also serves as a
reminder that the ultimate cost of bailing out Citigroup and the other “too big
to fail” institutions will remain unknown until the next financial crisis occurs.

Table of Contents
Introduction ................................................................................................................................................. 1
Background ................................................................................................................................................. 4
Stock Price Declines and Increases in CDS Spreads Trigger a Potential Run ........................................... 8
A Run on Citigroup Becomes a Possibility ........................................................................................... 10
Counterparties Pull Back from Citigroup .............................................................................................. 11
Citigroup Declared a ‘Systemic Risk’ ...................................................................................................... 13
Saving Citigroup at All Costs ................................................................................................................ 13
Systemic Risk Determination Process ................................................................................................... 13
FRB Assesses Citigroup’s Systemic Risk ............................................................................................. 13
FDIC Assesses Citigroup’s Systemic Risk............................................................................................ 14
Treasury Determines Citigroup Is a Systemic Risk............................................................................... 15
Citigroup’s Proposal and the Federal Regulators’ Response During Citi Weekend ................................ 17
Government Response ........................................................................................................................... 19
Government Guarantee of Distressed Assets ........................................................................................ 19
Additional Capital Injection .................................................................................................................. 21
Citigroup Receives the Government’s Term Sheet ............................................................................... 22
Continuing Concerns About Citigroup .................................................................................................. 23
Changes to the Guaranteed Portfolio and Conversion of the Government’s Preferred Stock .................. 25
Citigroup’s Rationale for Including Specific Assets ............................................................................. 27
Confirmation Process Finalizes the Asset Pool ..................................................................................... 29
Citigroup and Treasury Agree to Exchange Preferred Securities for Common and Trust Preferred
Securities ............................................................................................................................................... 30
Citigroup’s Request to Leave TIP and AGP ............................................................................................. 33
Factors Leading to Citigroup’s Proposal for TARP Redemption.......................................................... 34
Stress Test Results and Resulting Repayment Proposal ........................................................................ 35
TARP’s Remaining Citigroup Investment ............................................................................................ 38
Conclusions ............................................................................................................................................... 41
Management Comments and Audit Response .......................................................................................... 45
Appendix A − Scope and Methodology ................................................................................................... 46
Appendix B − Citigroup TARP Capital Changes ..................................................................................... 49
Appendix C − Governance and Asset Management Guidelines ............................................................... 50
Appendix D − Joint Statement by Treasury, Federal Reserve and FDIC on Citigroup............................ 51
Appendix E – Glossary ............................................................................................................................. 52

Appendix F − Definitions of Acronyms ................................................................................................... 56
Appendix G − Capital Raise Press Release .............................................................................................. 57
Appendix H – Citigroup Entities .............................................................................................................. 58
Appendix I – Citigroup Initial Proposal (November 22, 2008) ................................................................ 59
Appendix J – Government’s Term Sheet (November 23, 2008) .............................................................. 60
Appendix K − Audit Team Members ....................................................................................................... 64
Appendix L – Management Comments from Treasury, FDIC, and FRB................................................. 65

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

1

Introduction
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law. It
provided the Secretary of the Treasury with the authority and facilities to restore liquidity and stability to the
U.S. financial system, and included up to $700 billion under the Troubled Asset Relief Program (“TARP”).
Section 101 of EESA authorized the Treasury Secretary to purchase troubled assets from any financial
institution under terms, policies, procedures, and conditions determined by the Secretary. Section 102 of
EESA required that if the Treasury Secretary established an asset purchase program, a program must also be
established to guarantee troubled assets.
At the time of the enactment of EESA, Citigroup, Inc. (“Citigroup”) was one of the largest financial
institutions in the world. Specifically, as detailed by the Federal Reserve Board (“FRB”):1

1



As of September 30, 2008, Citigroup, including its insured depository institution subsidiaries, was
the second-largest banking organization in the United States and had total consolidated assets of
slightly more than $2 trillion. Citigroup’s lead subsidiary bank, Citibank, N.A. (“Citibank”), had
total consolidated assets of approximately $1.2 trillion, making it the third-largest U.S. depository
institution as measured by total assets. Citigroup held more than $794 billion of deposits at the end
of the third quarter of 2008, making it one of the largest deposit holders in the world. Of that
amount, domestic deposits totaled more than $277 billion, of which $175.4 billion was not insured
by the Federal Deposit Insurance Corporation (“FDIC”). Citigroup’s uninsured domestic deposits
exceeded the uninsured deposits at all but two other U.S.-insured depository institutions. Citigroup
held a large amount of foreign deposits and performed consumer banking across the globe in more
than 100 countries.2



Citigroup was a major supplier of credit in the United States and abroad. At the time, it was the
largest consumer finance lender in the world, the third-largest mortgage servicer, the fourth-largest
student lender, and the world’s largest credit card lender.3 Citigroup had more than $785 billion of
loans outstanding at the end of the third quarter of 2008, with nearly $450 billion of them at its U.S.
offices. Its domestic loans included more than $225 billion of residential real estate loans, almost
$100 billion of consumer loans, more than $50 billion of commercial and industrial loans, and more
than $10 billion of commercial real estate loans. FRB also stated that Citigroup was a major
securitizer of credit and had an interest in $1.2 trillion in special purpose vehicles4 (“SPVs”), of
which $718 billion was related to consumer credit.

FRB documented Citigroup’s size and systemic significance in a letter from FRB Chairman Ben Bernanke to then-Treasury
Secretary Henry Paulson, dated December 2, 2008, in which Chairman Bernanke recommended Secretary Paulson invoke a
systemic risk exception for Citigroup, which would permit the extraordinary assistance to Citigroup detailed in this report, and
in an FRB memo dated December 3, 2008, and titled, “Considerations Regarding Invoking the Systemic Risk Exception for
Citibank, N.A.”
2
According to Citigroup officials, more than 74% of Citigroup’s 2008 total net revenue was derived from foreign assets.
3
Figures as of November 2008.
4
A special purpose vehicle is an off-balance-sheet legal entity that holds the transferred assets presumptively beyond the reach of
the entities providing the assets, and is legally isolated.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

2



Citigroup had significant amounts of commercial paper and long-term senior and subordinated debt
outstanding, and was a major participant in numerous domestic and international payment, clearing,
and central counterparty arrangements.



Citigroup provided a wide range of investment banking, capital markets, asset management, and
retail brokerage services through its subsidiary Citigroup Global Capital Markets, Inc. Citigroup’s
brokerage arm, Smith Barney, was one of the largest in the United States by the end of the third
quarter of 2008, with $1.55 trillion in client assets in 9.2 million accounts.



Citigroup was also a major player in a wide range of derivatives markets, both as a counterparty to
over-the-counter trades and as a broker and clearing firm for trades on exchanges. At the end of the
third quarter of 2008, the notional principal value of its derivatives positions was more than
$35 trillion, the bulk of which was held by its Citibank, N.A., subsidiary.



Citigroup also operated its Global Transaction Services (“GTS”) unit, a wholly owned subsidiary
that had a presence in more than 100 countries and handled more than $3 trillion in transactions
around the world each day for hundreds of corporations and dozens of governments and agencies,
including the Federal Reserve. It is still the world’s largest provider of foreign currency exchange
services and holds large deposits for several Fortune 500 companies.

On October 28, 2008, Citigroup and eight other financial institutions became the first recipients of TARP
funds through the Capital Purchase Program (“CPP”),5 which was intended, in part, to “encourage U.S.
financial institutions to build capital to increase the flow of financing to U.S. business and consumers and to
support the U.S. economy.” This program provided Citigroup $25 billion – the maximum amount that
Treasury said it would invest in any one institution under CPP.6 This would not be the last time that
Citigroup benefited from TARP funds.
Government officials told the Office of the Special Inspector General for the Troubled Asset Relief Program
(“SIGTARP”) that the financial health of the first nine institutions selected to receive CPP funds was not a
primary factor in the institutions’ selection, though Government officials made several references to the
health of the nine institutions at the time. On October 14, 2008, for example, then-Treasury Secretary
Henry Paulson stated that the nine “are healthy institutions, and they have taken this step for the good of the
U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their
funding to U.S. consumers and businesses.” A joint statement released by Secretary Paulson, FRB
Chairman Ben Bernanke, and FDIC Chairman Sheila Bair on October 14, 2008, similarly stated that “these
healthy institutions are taking these steps to strengthen their own positions and to enhance the overall
performance of the U.S. economy.”
However, Citigroup’s health would soon come into question. Indeed, Citigroup suffered significant
instability shortly after receiving the initial $25 billion TARP investment. Citigroup would lose
5

Bank of America and Merrill Lynch were in the process of merging when CPP was announced. Through CPP, $15 billion was
immediately invested in Bank of America and $10 billion was pledged to Merrill Lynch, with the agreement that Bank of
America would receive those funds on consummation of the merger. The merger received regulatory approval on
November 26, 2008, and was completed on January 1, 2009.
6
JPMorgan Chase & Co., Bank of America Corporation, and Wells Fargo & Company each also received the maximum of
$25 billion in CPP.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

3

$27.68 billion in 2008, and by November 19, 2008, its stock price had dropped precipitously. In the view of
Secretary Paulson, the company was teetering on the brink of failure. The company’s survival was in doubt,
and the Government, through TARP and other means, stepped in to save one of the world’s largest financial
institutions. On November 23, 2008, Treasury, FRB, and FDIC announced a package of transactions
intended to reduce the risk of Citigroup failing and, in turn, dragging down the financial system with it (see
Appendix D). As part of the announced package, the Government said that it would provide guarantees in
connection with a Citigroup asset pool of up to $306 billion.7 Treasury, in a report to Congress, said that
extending the asset guarantee, which was not executed until January 15, 2009, was “part of a broader effort
to support Citigroup as the company executes its restructuring plans.” The announcement also promised
Citigroup an additional $20 billion in TARP funds (considered exceptional financial assistance by Treasury)
in return for additional shares of preferred stock and warrants, a transaction that closed on
December 31, 2008. On January 2, 2009, Treasury announced the titles of these previously disclosed
assistance transactions: the asset pool protection was named the Asset Guarantee Program (“AGP”) and the
additional capital assistance was named the Targeted Investment Program (“TIP”).
Over the following year, the economy and Citigroup’s outlook improved. The financial system stabilized,
the flow of private capital returned for many of the largest institutions, and Citigroup’s capital structure was
significantly improved through capital exchanges that occurred on July 23, 2009, and July 30, 2009. In
these exchanges, preferred shares, including Treasury’s initial $25 billion CPP investment, were converted
into common stock, which was more favorable to Citigroup’s balance sheet.8
In December 2009, less than 12 months after providing the additional assistance, Federal regulators
approved Citigroup’s exit from TIP and AGP. Among other things, Citigroup’s exit from TIP meant that it
was no longer subject to TARP’s exceptional financial assistance requirements, which had imposed upon
Citigroup enhanced executive compensation review and approval. However, Citigroup told SIGTARP it
voluntarily abided by those restrictions through 2009. As of December 10, 2010, Treasury had sold all
7.7 billion shares of common stock in Citigroup that it received as a result of the CPP exchange. As part of
SIGTARP’s continuing oversight of TARP, and to respond to a request from then-Congressman Alan
Grayson, SIGTARP performed a review of the U.S. Government’s decision to provide additional funding
and asset guarantees to Citigroup. The report’s objectives are to determine:




the basis for the decision to provide Citigroup with additional Government assistance;
how the asset guarantee pool was determined; and
the basis for the decision to permit Citigroup to terminate its AGP agreement and repay its TIP
capital infusion.

For a discussion of the audit scope and methodology, and a summary of prior coverage, see Appendix A.
For additional information and comments from responding agencies, see other appendices.

7

Treasury’s press release dated November 23, 2008, stated $306 billion; however, that number was adjusted to $301 billion when
the final Master Agreement was signed on January 15, 2009.
8
For more information on these exchanges, see SIGTARP’s Quarterly Report to Congress, October 21, 2009, pages 68-69.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

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Background
By the end of September 2008, financial markets as a whole had suffered a loss in investor confidence.
During that month, a succession of major U.S. financial institutions either collapsed or approached the brink
of failure, and for some the Government stepped in to provide Federal assistance. The critical events
included:

9



September 7 – The Federal Housing Finance Agency (“FHFA”), which had been created two months
earlier, placed under conservatorship two of the Government-sponsored enterprises, the Federal
National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation
(“Freddie Mac”). Both are key participants in the secondary mortgage market.9



September 15 – Lehman Brothers, Inc. (“Lehman”) filed for bankruptcy. To many market
observers, the failure of Lehman was particularly detrimental to market confidence because it
demonstrated that the Government might not be willing to rescue large financial institutions.



September 15 – Bank of America announced plans to purchase Merrill Lynch – at that time the
nation’s sixth-largest financial institution.



September 16 – With the approval of FRB and with the support of Treasury, Federal Reserve Bank
of New York (“FRBNY”) provided an $85 billion credit facility to insurance conglomerate
American International Group (“AIG”) to prevent its failure. FRBNY acquired an approximately
80% equity interest in the company as consideration for extending the credit facility. Government
officials believed that an AIG failure would pose considerable risk to the global financial system and
would have significantly intensified an already severe financial crisis.10



September 21 – The large investment banking firms Goldman Sachs Group, Inc. (“Goldman Sachs”)
and Morgan Stanley converted to bank holding companies. The conversions allowed them greater
access to more stable sources of funding from retail deposits and made them eligible for Government
assistance to which they otherwise would not have been entitled.



September 25 – Washington Mutual, Inc. was closed by the Office of Thrift Supervision (“OTS”)
and FDIC was named receiver in what was the largest depository institution failure in U.S. history.



September 29 – Citigroup issued a press release relating to its announced agreement in principle to
acquire the banking operations of Wachovia Corporation (“Wachovia”) in an FDIC-assisted
transaction. Four days later, on October 3, 2008, Wells Fargo & Company (“Wells Fargo”)
announced that it would purchase Wachovia without FDIC assistance. On October 9, 2008,
Citigroup announced that it had ended its negotiation with Wells Fargo on the Wachovia transaction.
Former Comptroller of the Currency John Dugan told SIGTARP that he believed that the failure of
the Citigroup-Wachovia deal contributed to negative market perceptions of Citigroup. According to

In the secondary mortgage market, mortgage loans and servicing rights are bought and sold between mortgage originators,
mortgage aggregators (including the housing-related Government-sponsored enterprises), and investors.
10
For a more complete discussion of the decision to rescue AIG, see SIGTARP’s audit report on “Factors Affecting Efforts to
Limit Payments to AIG Counterparties,” SIGTARP-10-003, November 17, 2009.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

5

an Office of the Comptroller of the Currency (“OCC”) examiner, it appeared to the market that
something was structurally wrong with Citigroup and that the company was not strong enough to
merge with Wachovia.11


September 29 – The U.S. House of Representatives voted down H.R. 3997, the original version of
the legislation that later created TARP and that would have authorized Treasury to assist banks by
purchasing, managing, and selling troubled mortgage-related assets. That same day, the Dow Jones
Industrial Average suffered its largest one-day point loss in history, dropping 777.68 points.

These events, among others, devastated investor confidence in the nation’s financial system and set the
stage for the ensuing TARP. In addition, in response to the continuing and growing economic crisis, the
U.S. and other governments sought to implement even more aggressive plans to address the stresses on
financial institutions in their countries and the turmoil in the global financial markets. The governments of
the United Kingdom, Germany, France, Canada, Ireland, and Sweden either provided liquidity and capital
injections to their institutions or banned short selling of stocks of several financial institutions.
Although Congress rejected Treasury’s initial proposal to assist banks, Congress enacted EESA on
October 3, 2008. The first wave of TARP financial assistance was announced on October 14, 2008, in the
form of CPP investments. Treasury announced that it created CPP to provide funds to “stabilize and
strengthen the U.S. financial system by increasing the capital base of an array of healthy, viable institutions,
enabling them [to] lend to consumers and businesses.” Secretary Paulson stated in a press release that the
intent of the program “is to increase confidence in our banks and increase the confidence of our banks, so
that they will deploy, not horde [sic], their capital. And we expect them to do so, as increased confidence
will lead to increased lending. This increased lending will benefit the U.S. economy and the American
people.” One of the first uses of TARP funds was to pledge a total of $125 billion of capital to nine major
financial institutions as part of CPP, which was originally approved to provide up to a total of $250 billion
of TARP funds to institutions deemed to be “Qualifying Financial Institutions.”12
According to Treasury, the nine financial institutions identified to receive the initial $125 billion investment
were selected for their perceived importance to the greater financial system. Citigroup received $25 billion
in that initial capital commitment. This was loosely based on a formula, determined by Treasury, that
institutions receive 1% to 3% of their risk-weighted assets,13 to a maximum of $25 billion. Citigroup, as of
September 30, 2008, held almost $1.18 trillion of risk-weighted assets, and received the maximum
investment of $25 billion in return for preferred stock. 14 Despite the initial assistance from Treasury,
11

OCC requested deletion of portions of statements attributed to former Comptroller of the Currency John Dugan and an OCC
examiner that appeared in the original version of this report. These statements concerned the market’s perception of the failure
of the Citigroup-Wachovia deal. Based on further review, SIGTARP chose to honor this request and amended the paragraph
accompanying this footnote accordingly. The revision did not affect the report’s findings or conclusions.
12
Qualifying Financial Institutions were private and public U.S.-controlled banks, savings associations, bank holding companies,
and certain savings and loan holding companies that were deemed “healthy and viable.”
13
Risk-weighting of assets is the classification of assets according to the risk of loss from investment in the asset. A bank’s assets
are weighted according to credit risk, and some assets, such as debentures, are assigned a higher risk than others, such as cash
or Government bonds. This sort of asset calculation is used by regulators to determine the capital requirements for financial
institutions.
14
Preferred equity ownership usually pays a fixed dividend prior to distributions for common stock owners but only after
payments due to holders of debt and depositors. It typically confers no voting rights. Preferred stock also has priority over
common stock in the distribution of assets when a bankrupt company is liquidated.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

6

disruptions in the financial markets and losses in the financial industry continued, and the nine institutions
that initially received CPP funds collectively lost $40.9 billion in the fourth quarter of 2008 alone.15 ThenFRBNY President Timothy F. Geithner told SIGTARP that even though the CPP investments helped slow
the momentum of the financial panic, there was still tremendous stress on the system. He stated, “It was
clear in late October and early November that we would have to escalate the commitment to large
institutions that needed additional assistance.”
In a matter of weeks, two of the nine institutions (Citigroup and Bank of America) needed additional
support. On November 23, 2008, the Federal Government announced that it would provide Citigroup with
further assistance, including an asset guarantee and an additional $20 billion of TARP funds in the form of a
preferred equity capital injection. Together with CPP, the $20 billion brought the total TARP capital that
Treasury announced or awarded to Citigroup in little more than a month to $45 billion. Citigroup received
the additional $20 billion on December 31, 2008.16 Two days later, on January 2, 2009, the Federal
Government announced that the funding had been provided under the newly titled Targeted Investment
Program (“TIP”).17
Treasury described the new investment program as intended to stabilize the financial system by making
investments in institutions it deemed critical to the system’s functioning. The only institutions to receive
funds under TIP were Citigroup and Bank of America. The stated goal of this program was to invest funds,
on a case-by-case basis, “to strengthen the economy and protect American jobs, savings, and retirement
security” where “the loss of confidence in a financial institution could result in significant market
disruptions that threaten the financial strength of similarly situated financial institutions.”18 TIP allowed
Treasury to make targeted investments in financial institutions beyond those under CPP if it believed a loss
of confidence would threaten other similar institutions, the broader financial markets, or the economy as a
whole. Treasury announced the following five determining factors for deciding whether to make future
investments under this program:
1. the extent to which destabilization of an institution could have threatened the viability of its creditors

and counterparties, whether directly or indirectly;

2. the extent to which an institution was at risk of a loss of investor confidence and the degree to which

that stress was caused by a distressed or illiquid portfolio of assets;

15

The profit or <loss> for each of the nine institutions in the fourth quarter of 2008 was: Bank of America Corporation,
<$1,789,013,000>; The Bank of New York Mellon Corporation, $61,000,000; Citigroup, Inc., <$17,263,000,000>; Goldman
Sachs Group, Inc., <$2,006,000,000>; JPMorgan Chase & Co., $702,000,000; Morgan Stanley, <$2,295,000,000>; State Street
Corporation, $256,747,000; Wells Fargo & Company, <$2,734,000,000>; Merrill Lynch & Co., Inc., <$15,844,000,000>.
16
After consultation with Chairman Bernanke, Secretary Paulson signed a determination on December 30, 2008, stating that
shares of preferred stock and warrants issued by Citigroup are financial instruments the purchase of which is necessary to
promote financial stability, and, as such, are “troubled assets,” eligible to be purchased under TARP. The Secretary’s
determination was transmitted to the appropriate committees of Congress that same day in accordance with Section 3(9) (B) of
EESA.
17
A senior Treasury official told SIGTARP that Treasury could have made the $20 billion TIP investment under the existing
Systemically Significant Failing Institution program, which had been announced in November 2008 in connection with its
assistance of AIG, but Treasury did not do so, in part because it did not want to identify Citigroup as a “failing institution.”
18
Treasury, Guidelines for Targeted Investment Program, updated 11/20/2009,
http://www.financialstability.gov/roadtostability/tipguidelines.html, accessed 11/3/2010.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

7

3. the number and size of financial institutions that were similarly situated, or that would likely have

been affected by destabilization of the institution being considered for the program;

4. whether the institution was sufficiently important to the nation’s financial and economic system such

that a loss of confidence in the firm’s financial position could potentially have caused major
disruptions to credit markets or payment and settlement systems, destabilized asset prices,
significantly increased uncertainty, or led to similar losses of confidence or financial market stability
that materially could have weakened overall economic performance; and

5. the extent to which the institution had access to alternative sources of capital and liquidity, whether

from the private sector or from other sources of Government funds.

At the same time that Citigroup announced the additional $20 billion preferred stock investment by
Treasury, Citigroup announced a third transaction with the Government, which, according to Citigroup
officials, was patterned conceptually on a plan that was developed, in conjunction with regulators, when
Citigroup agreed to purchase Wachovia’s banking operations. Treasury, FDIC, and FRBNY agreed to
guarantee a portion of potential losses on a designated pool of Citigroup assets valued initially at
approximately $306 billion through a program that Treasury would later name AGP.19 The asset pool was
also referred to as a “ring-fence.” AGP provided certain loss protections “for assets held by systemically
significant financial institutions that face a high risk of losing market confidence due in large part to a
portfolio of distressed or illiquid assets.”20 Treasury and FDIC received $7.059 billion in preferred stock
from Citigroup in exchange for the guarantee.21 Of this, Treasury received $4.034 billion and FDIC
received $3.025 billion.
Although Citigroup was the only institution to receive an asset guarantee through AGP,22 Treasury
announced five factors it may consider, among other things, in determining whether to use the program for
an institution. The factors for AGP were the same as those listed above for TIP.

19

Pursuant to Section 102 of EESA, Treasury issued a written report to Congress on December 31, 2008, in connection with the
insurance program (i.e., AGP) established under Section 102 (a).
20
Treasury, Section 102 Report, December 31, 2008, http://www.treas.gov/press/releases/reports/0010208%20sect%20102.pdf,
accessed August 10, 2010.
21
Treasury also received warrants to purchase common stock from Citigroup as part of CPP, AGP, and TIP transactions.
22
While Treasury announced an AGP transaction for Bank of America, the transaction was not completed.

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EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

Stock Price Declines and Increases in CDS Spreads Trigger a
Potential Run
This section presents a description of the market events that led to the decision to provide Citigroup with
extraordinary Government assistance.
Even after Citigroup received $25 billion in CPP funds, its stock price dropped steadily and dramatically in
the first three weeks of November 2008, and FRBNY’s General Counsel told SIGTARP that the market still
perceived Citigroup as an institution “less strong than others.” Robert Rubin, a former Citigroup Director
and Senior Counsel, told SIGTARP that on the evening of November 18, 2008, he called Treasury Secretary
Paulson to tell him short sellers were attacking the bank, and that the Securities and Exchange Commission
(“SEC”) should reimpose the uptick rule on short selling.23 Citigroup’s share price fell from around $13.99
at the market’s close on November 3, 2008, to $3.05 per share on November 21, 2008, before closing that
day at $3.77. In the week leading up to the decision to extend Citigroup extraordinary assistance,
Citigroup’s stock decreased far more than that of its peers, losing over half its value (see Figure 1 for
Citigroup’s stock price from November 17-21, 2008).
FIGURE 1

CITIGROUP AND PEERS CUMULATIVE STOCK PRICE FOR THE WEEK OF NOVEMBER 17, 2008
0%

Cumulative % Change

-10%
-20%
-30%
-40%
-50%
-60%
-70%
17-Nov-08

18-Nov-08

19-Nov-08

20-Nov-08

21-Nov-08

Citigroup

-7%

-12%

-33%

-51%

-60%

Bank of America

-8%

-7%

-20%

-31%

-30%

JPMorgan
Chase

-5%

-7%

-17%

-32%

-34%

Note: The cumulative change is from Friday, November 14, 2008, and is based on closing prices.
Source: SIGTARP analysis of Bloomberg data.

Referring to the drop in Citigroup’s stock price, Citigroup Vice Chairman Ned Kelly told SIGTARP “it
wasn’t entirely clear why we had a problem. It appeared to be market psychology without any regard to
23

The uptick rule was mandated by the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The rule
required that a short sale transaction be entered only at a price that is higher than the price of the previous trade. A short sale
occurs when an investor enters into an agreement to sell a stock at a current price and at a later time buy that amount of stock at
what the investor hopes will be a lower price. The uptick rule prevents short sellers from adding to the downward momentum
when the price of an asset is already declining. The SEC revoked the uptick rule in September 2007.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

9

fundamentals.” He said he believed that Citigroup’s underlying financials had not changed. FRB Chairman
Bernanke told SIGTARP that Citigroup’s biggest problems were credit and confidence, and an FRBNY
official told SIGTARP that FRBNY had observed this same type of activity preceding the failure of
Lehman. He told SIGTARP that “banking is a game of confidence…and we saw the behavior and the lack
of confidence, …[which] was alarming.”
Citigroup Chief Executive Officer (“CEO”) Vikram Pandit testified before the Congressional Oversight
Panel on March 4, 2010, that he believed Citigroup was a “healthy financial institution” both on
October 1, 2008, and on November 21, 2008. Mr. Pandit testified that Citigroup’s problems were “not
about the capital we had, not about the funding we had at that time, but with the stock price where it was.”
In an interview with SIGTARP, Mr. Pandit reiterated his view that Citigroup was “financially healthy” on
November 21, 2008, and clarified that he meant that Citigroup was comfortable with its capital, liquidity,
reserves, and portfolio asset values. He stated that the financial health of the company was not the issue, but
that the market had seen significant stock price declines with Lehman, Merrill Lynch, and AIG immediately
prior to the financial distress of these companies, and now the same thing was happening at Citigroup.
Mr. Pandit indicated that, in a market that is not completely rational, when the stock price declines to a
certain level, the perception of the stock price can create a reality.
During this time, market participants also began to question Citigroup’s ability to honor its commitments. A
strong indicator that the market had lost confidence in Citigroup was that those who owned Citigroup debt
(i.e., its bonds) were finding it increasingly expensive to hedge that debt. The price for a credit default swap
(“CDS”), which essentially provides insurance against default, was increasing dramatically. In other words,
the market was increasingly concerned that Citigroup would not be able to make good on its debts.
Regulators frequently cited the
expansion of Citigroup’s CDS
Credit Default Swaps and CDS Spreads
spreads as one of the most telling
A credit default swap (“CDS”) is an insurance-like contract in
indicators of the market’s perception
of Citigroup during the period leading which the seller receives a series of payments from the buyer in
return for agreeing to make a payment to the buyer if a particular
up to the implementation of AGP and
credit event outlined in the contract occurs – for example, if a bond
TIP.
or loan goes into default. A CDS spread is stated as a percentage
of par value that the insurance buyer is willing to pay the insurance
Figure 2 illustrates that from
seller in exchange for the insurance for a specific period. For the
November 17, 2008, through
purposes of this report, CDS spreads are stated as annualized
November 21, 2008, the company’s
CDS spreads more than doubled. The quarterly payments. The higher the CDS spread, the more
expensive it is to buy protection against default, reflecting that the
CDS spreads of Bank of America and
market sees that the institution standing behind the bond is more
JPMorgan Chase, meanwhile, had
likely to default on its obligations. In other words, the greater the
been about half those of Citigroup
spread, the less creditworthy the institution is regarded by the
and increased far less significantly
market.
during that week.

10

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

FIGURE 2

CREDIT DEFAULT SWAP SPREADS
5.0%
4.5%
4.0%

Citi CDS Spread

3.5%
3.0%
Citigroup

2.5%

Bank of America
JPMorgan Chase

2.0%
1.5%
1.0%
0.5%
0.0%
17-Nov-08

18-Nov-08

19-Nov-08

20-Nov-08

21-Nov-08

Source: SIGTARP analysis of company data.

Both the stock price and Citigroup’s credit default swap spread changed unfavorably, as depicted in
Figure 3 below.

A Run on Citigroup Becomes a Possibility

Secretary Paulson, FRB, and OCC expressed concern at the time that depositors might start a run24 on
Citigroup, and that as a result, the bank would suffer a severe liquidity crisis (not have enough cash on
hand) and not be able to meet its obligations as they became due. On Friday, November 21, 2008, these
concerns were substantiated by significant corporate withdrawals (i.e., a run), primarily in the U.S. and
secondarily in Europe. An OCC official stated that OCC received indications that problems related to
deposit outflows were also beginning to emerge for Citigroup in Asia’s Monday morning trading hours (the
evening of Sunday, November 23, 2008, Eastern Standard Time (“EST”)) until the Government announced
its support of Citigroup.
Citigroup CEO Pandit acknowledged that the unfavorable stock price movements could have been a cause
of the significant deposit outflows occurring on November 21, 2008. Over the course of just one night
(November 20-21, 2008), Citigroup’s balance of available funds in its GTS unit shrank by $13.8 billion,
from $288.0 billion to $274.2 billion. If Citigroup’s deposit outflows continued and Citigroup was not able

24

A run occurs when large numbers of depositors suddenly demand to withdraw their deposits from a bank. This may be caused
by a decline in depositor confidence or fear that the bank will be closed by the chartering agency. Banks keep only a small
fraction of their deposits in cash reserves, and thus, large numbers of withdrawals in short periods of time can cause even a
healthy bank to have a severe liquidity crisis that could cause the bank to be unable to meet its obligations and fail.

11

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

to access additional liquidity, FRBNY and OCC officials questioned whether Citigroup could make it
through the following week.
FIGURE 3

CITIGROUP CDS SPREAD VS. STOCK PRICE
$16
$14

5.0%
4.5%
4.0%

$12
3.5%

$8
$6

3.0%
2.5%
2.0%

CDS Spreads

Stock Price

$10

1.5%
$4
1.0%
$2
$0

0.5%
0.0%
Stock
CDS

Source: SIGTARP analysis of company data.

Counterparties Pull Back from Citigroup
By mid-November 2008, Citigroup had started receiving calls from investors, counterparties, fund
managers, and other professional investors inquiring about the viability of the institution, and asking for
more and better collateral on Citigroup debts that the investors held. The OCC Deputy Comptroller for
Large Bank Supervision told SIGTARP that “numerous counterparties called with concerns about
counterparty risk.” FRBNY President Geithner told SIGTARP that he observed the stock price declining
and funding becoming shorter term and more expensive on a daily basis.
According to an FRBNY official, by November 21, 2008, counterparties began to “pull back from
Citigroup” because of its perceived decline in creditworthiness. This meant, as he described it, that
Citigroup’s counterparties were increasingly unwilling to engage in financial transactions with Citigroup or
to provide it with credit. These included federal funds25 market counterparties (other depository institutions
that would normally extend Citigroup credit in overnight borrowing) and, even more troubling, secured
financing26 counterparties. The FRBNY official described short-term funding through secured financing as
a “good liquidity barometer.” Liquidity is the degree to which an asset can be easily converted to cash.
25

Federal funds are unsecured loans (loans without collateral) of reserve balances at Federal Reserve Banks between depository
institutions. The most common duration or term for a federal funds transaction is overnight, although longer-term deals are
arranged.
26
Under a short-term secured financing arrangement, lenders receive an asset as collateral in exchange for a loan. They hold the
collateral for the period of time that the loan is outstanding (e.g., one week), and then return the collateral once the loan is

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

12

An FRBNY official told SIGTARP that it was “a bad sign” when lenders started to differentiate Citigroup’s
collateral from its peers or declined short-term funding for Citigroup. Another FRBNY official stated that it
was clear the market was singling out Citigroup, as its peers were not experiencing the same problems.
Citigroup was also having difficulty issuing commercial paper. A former Citigroup Treasurer told
SIGTARP that it became hard for Citigroup to finance commercial paper for any length of time beyond
overnight but stated that it was not an important avenue of liquidity. FRBNY officials told SIGTARP that
commercial paper purchasers such as mutual funds lost confidence in Citigroup’s ability to repay, which
forced Citigroup to issue debt with shorter maturities.

repaid. In the event the borrower defaults on the loan, the lender retains the collateral, which is typically comparable in value
to the loan extended.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

13

Citigroup Declared a ‘Systemic Risk’
This section describes the conclusions of the relevant Government entities that a failure of Citigroup would
constitute a systemic risk to the national and global economy and that Citigroup therefore needed
additional Government assistance.

Saving Citigroup at All Costs
An FRBNY official told SIGTARP that a consensus of Federal Government parties held that it was
necessary to “save Citigroup at all costs” in order to stabilize the nation’s financial system. OCC,27
Treasury, FRB, and FDIC took active roles and ultimately concluded that, without additional assistance,
Citigroup could collapse, resulting in systemic effects throughout the financial markets and the economy as
a whole. Citigroup CEO Pandit stated he did not know what the systemic effects of a Citigroup failure
would be, and, essentially, that no one wanted to find out. CEO Pandit told SIGTARP, “We saw what
happened with Lehman, and we’re a lot bigger than Lehman.”

Systemic Risk Determination Process
By law, FDIC could not participate in the Government’s assistance package for Citigroup, which would
constitute “open bank assistance,”28 without a waiver from the Secretary of the Treasury in the form of a
Systemic Risk Determination.29 In order to make this determination, which includes the conclusion that
FDIC’s normal resolution process “would have serious adverse effects on economic conditions or financial
stability,”30 the Secretary of the Treasury must first receive recommendations from the Board of Directors of
FDIC31 and the Board of Governors of the Federal Reserve System, and consult with the President of the
United States.

FRB Assesses Citigroup’s Systemic Risk
On the morning of Thursday, November 20, 2008, Secretary Paulson and FRBNY President Geithner held a
conference call with FRB Chairman Bernanke, FDIC Chairman Bair, and Comptroller Dugan to discuss
Citigroup. Chairman Bernanke told SIGTARP they discussed Citigroup’s condition and the “too big to fail”
issue. During the call, FRBNY President Geithner told the other principals, “We’ve told the world we’re
not going to let any of our major institutions fail. We are going to have to make it really clear we’re
standing behind Citigroup.” According to Chairman Bernanke, it was “not even a close call to assist them.”
Chairman Bernanke told SIGTARP that a Citigroup failure “would have been Lehman times two or three in
terms of the financial sector and the economy.” “This was a view strongly held” at the time, he said.
Citigroup was perceived as being interdependent and interconnected with a broad array of different financial
institutions both in the U.S. and internationally, and in FRB’s view, Citigroup’s failure would have
implications that reached beyond the bank itself, including serious adverse effects on domestic and
27

OCC, as one of Citigroup’s primary regulators, played an extensive role throughout Citi Weekend in providing material data
and analysis about Citibank to FDIC and FRB.
28
In an open bank assistance agreement, FDIC provides financial assistance to an operating insured bank or thrift determined to
be in danger of closing.
29
12 U.S. Code, section 1823(c)(4); 12 C.F.R. 360.1. The only exception to the “least-cost resolution” requirement is when it is
determined that a systemic risk to the financial system exists. 12 U.S. Code, section 1821(c)(4)(G).
30
12 U.S. Code, section 1823(c)(4)(G)(i)(I).
31
The Board of Directors of the FDIC includes the FDIC Chairman, FDIC Vice Chairman, FDIC Director, Comptroller of the
Currency, and the Director of the Office of Thrift Supervision.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

14

international economic conditions and financial stability. Specifically, FRB regulators believed that a
Citigroup failure would have destabilized the global financial system by seriously impairing already
disrupted credit markets, including short-term interbank lending, counterparty relationships in qualified
financial contract32 markets, bank and senior subordinated debt markets, and derivatives.
Given the significance of Citigroup’s GTS unit,33 the collapse of Citigroup would have had devastating
effects on the broader economy. Chairman Bernanke told SIGTARP that he believed that a Citigroup
failure had the potential to block access to ATMs and halt the issuing of paychecks by many companies and
governments. An FDIC official separately said that adverse effects on money market liquidity could be
expected on a global basis.
According to FRB’s memorandum assessing the company’s systemic risk, Citigroup also was a major
player in a wide range of derivatives markets, both as a counterparty to over-the-counter trades, and as a
broker and clearing firm for trades on exchanges. At the end of the third quarter, the notional principal
value of its derivatives positions was more than $35 trillion, the bulk of which was held by its Citibank,
N.A., subsidiary. A failure of Citigroup would have left many of its derivatives counterparties scrambling
to replace contracts that they had with Citigroup. Citigroup’s derivatives positions were fairly well
balanced, so in more normal conditions counterparties might be able to replace Citigroup’s derivatives
contracts relatively easily, according to the FRB memo. However, given concerns about counterparty credit
risk and strains in some derivatives markets at the time, those contracts might have proven difficult to
replace.
On November 23, 2008, the Board of Governors of the Federal Reserve voted unanimously to recommend
to the Secretary of the Treasury that a potential Citigroup failure posed a systemic risk.

FDIC Assesses Citigroup’s Systemic Risk
On Sunday, November 23, 2008, FDIC’s Board of Directors met to consider whether or not to recommend
that Treasury invoke the systemic risk exception and allow FDIC to participate in open bank assistance.
During this meeting, FDIC staff recommended that the Board find that the failure of Citigroup and its
insured affiliate banks and thrifts would have serious adverse effects on domestic and international
economic conditions and financial stability.
Based largely on information from Citigroup’s primary regulators, FRB and OCC, FDIC’s Board of
Directors and FDIC staff discussed how Citigroup’s failure would seriously and negatively affect already
disrupted credit markets, including short-term interbank lending, counterparty relationships, qualified
financial contracts markets, and bank and senior subordinated debt markets, and would further disrupt the
related markets in derivatives and other products. In addition, they noted in the meeting that Citigroup’s
failure would have serious consequences for the functioning of the global payment system. Chairman Bair
told SIGTARP, “We were told by the New York Fed that problems would occur in the global markets if Citi
were to fail. We didn’t have our own information to verify this statement, so I didn’t want to dispute that
with them.” During this meeting several concerns were highlighted by FDIC Board members and staff:
32

A qualified financial contract is a type of financial agreement that includes, but is not limited to, securities contracts, forward
contracts, repurchase agreements, and swap agreements.
33
The GTS unit offers integrated cash management, trade, and securities and fund services to multinational corporations, financial
institutions, and public sector organizations spanning more than 100 countries and 65,000 clients.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.








15

“It’s obviously a systemic risk situation. I don’t have any question about that,” said Office of Thrift
Supervision Director John Reich.
“The risk profile of Citibank34 is increasing rapidly due to the market’s lack of confidence in the
company and the substantially weakened liquidity position. Without substantial Government
intervention that results in a positive market perception on Monday morning, OCC and Citigroup
project that Citibank will be unable to pay obligations or meet expected deposit outflows next
week,” an FDIC official said.
“We were on the verge of having to close this institution because it can’t meet its liquidity Monday
morning,” Chairman Bair said. “They have $500 billion in foreign deposits that nobody can
guarantee.”
“The issue now is the potential for a large worldwide bank run, and that’s what has got to be brought
under control,” one participant35 said.

At the end of the November 23, 2008, meeting, the FDIC Board unanimously voted to recommend that
Treasury invoke the systemic risk exception for Citigroup, thereby authorizing FDIC’s participation in open
bank assistance to the firm in the form of a ring-fence of assets later to be titled the Asset Guarantee
Program. While the vote was unanimous, OTS Director Reich, an FDIC Board member, expressed the
concern that there had been “some selective creativity exercised in the determination of what is systemic
and what’s not,” and that there “has been a high degree of pressure exerted in certain situations, and not in
others, and I’m concerned about parity.” In terms of Citigroup, an FDIC official told SIGTARP that the
FDIC directors and other Government entities “made a judgment call.” With both recommendations in
hand, Secretary Paulson was then able to move forward with the process to invoke the systemic risk
exception for Citigroup.

Treasury Determines Citigroup Is a Systemic Risk
On November 21, 2008, Secretary Paulson said, “If Citi isn’t systemic, I don’t know what is.” Secretary
Paulson consulted with President Bush about making an emergency Systemic Risk Determination for five
Citigroup subsidiary banks, which then authorized FDIC to take appropriate action under the systemic risk
exception.
An undated action memorandum for the Secretary discussed Treasury’s reasons for supporting the Systemic
Risk Determination. According to the memorandum, Citigroup’s failure would threaten the viability of
creditors and counterparties exposed to the institution, impair the liquidity of even well-capitalized
institutions, dislocate the credit markets, and undermine business and household confidence in the broader
economy.
Secretary Paulson ratified the actions he took on November 23, 2008, in a written determination he executed
on January 15, 2009.36 That determination states that FDIC and FRB both recommended that the Secretary
34

Citibank, also known as Citibank, N.A., is the largest of Citigroup’s five insured entities.
The record of this meeting failed to identify which meeting participant made this statement.
36
Treasury submitted written notice to Congress, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Corporation
Improvement Act of 1991, on December 7, 2009, stating the Systemic Risk Determination, the least-cost resolution exemption,
and therefore the AGP, would be available to Citigroup. In the same written notice, Treasury explained its delay in notifying
Congress: “In reviewing the Department of the Treasury's records, we have not been able to ascertain whether you received the
formal notice of this determination as required by Section 13(c)(4)(G). As such, we are providing to you notice of the
determination and have attached a copy of the written determination made by Secretary Paulson.”
35

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16

make an emergency Systemic Risk Determination, states that the Secretary has consulted with the President
about such a determination, and concludes that the Secretary has made such a determination. The
determination also states that FDIC’s least-cost resolution requirements with respect to Citigroup would
have had serious effects on economic conditions and financial stability, and FDIC’s taking of other action
under the emergency systemic risk exception (i.e., AGP) would avoid or mitigate such effects.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

17

Citigroup’s Proposal and the Federal Regulators’ Response
During Citi Weekend
This section presents the discussions that led to the form of the Federal Government’s additional assistance
to Citigroup.
On Friday, November 21, 2008, FRBNY officials held a conference call with Citigroup officials. During
this conversation, FRBNY officials said, it became clear that the risk profile37 of Citigroup was increasing
rapidly, and liquidity pressures had reached crisis proportions. Based on this judgment – and its view of the
systemic risk that Citigroup presented to the economy – FRBNY requested that Citigroup submit a proposal
for additional Government assistance, without specifying the details of what Citigroup should include in the
proposal. Citigroup agreed to draft a proposal. Federal officials would later label the weekend of this
crisis – November 21-23, 2008 – as “Citi Weekend.”
At 3:36 a.m. on Saturday, November 22, 2008, Citigroup provided FRBNY with a proposal for additional
Government assistance.38 Citigroup CEO Pandit told SIGTARP that this proposal was based on a plan
developed with regulators for Citigroup’s unsuccessful attempt to purchase Wachovia. Citigroup’s original
proposal did not seek a capital injection but instead included the request that the Government guarantee
100% of the total value of $306 billion in a pool of specified troubled assets. In exchange for this guarantee,
Citigroup would issue the Government $20 billion in preferred stock. This stock would pay a 5% annual
dividend and could be repaid or converted into common stock, at Citigroup’s preference, in five years.
Citigroup CEO Pandit described the $20 billion in preferred stock as “paying for expected losses. The first
loss would have resulted in a loss for the Government. There was an expected loss for it.” The proposal did
not list specific assets, but listed general asset classes that Citigroup’s Chief Risk Officer for Real
Estate/Mortgages told SIGTARP were causing investors the most concern. Included were assets such as
residential mortgage-backed securities (“RMBS”),39 commercial mortgage-backed securities (“CMBS”),40
consumer mortgages, commercial real estate, collateralized debt obligations (“CDOs”), 41 and troubled
corporate loans. Among the different asset classes, Citigroup included assets with “tail risk” – assets that
had a low probability of losses, but for which any losses would be severe or complete. Citigroup selected
these assets, which the “public most feared,” to make up the majority of its proposed asset pool.42
37

An FDIC official clarified that “risk profile” referred to Citigroup’s liquidity risk. In the market, the lack of confidence in
Citigroup was stressing its liquidity ‒ there was a run on Citigroup’s foreign deposits, and counterparties had stopped providing
the institution with wholesale funding.
38
Citigroup, in an email sent to FRBNY at 11:14 p.m. on Saturday, November 22, 2008, also requested that FRBNY double the
financing capacities of its subsidiaries under the Commercial Paper Funding Facility (“CPFF”), a program that helped
institutions obtain short-term financing. This request was denied.
39
An RMBS is a financial instrument backed by a pool of residential real estate mortgages.
40
A CMBS is a financial instrument backed by a pool of commercial real estate mortgages.
41
A collateralized debt obligation is a financial instrument that entitles the purchaser to some portion of the cash flows from a
portfolio (or group) of assets, which may include bonds, loans, mortgage-backed securities, or even other CDOs.
42
Citigroup’s proposal consisted of three pages. The first page, with the heading “Structure / Term Sheet,” is included in
Appendix I. The second page, with the heading “Financial Impact,” described Citigroup’s assessment of the impact of its
proposal on its capital ratio and pro forma profit-and-loss statement. The third page, with the heading “Ring-Fenced Assets and
Expected Losses,” listed the asset class categories and detailed their dollar amounts, reserves, and expected losses. Citigroup
objected to SIGTARP’s inclusion of the Financial Impact page and the Ring-Fenced Assets and Expected Losses page in this
report, contending that the estimates of pro forma financial impacts, without underlying information about the relevant
assumptions upon which they were based, could mislead readers, and that Citigroup’s method of calculating its pro forma

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

18

FRBNY officials forwarded Citigroup’s proposal to Federal regulators (the Board of Governors of the
Federal Reserve System, FDIC, OCC, and Treasury) for review in advance of a meeting scheduled for the
afternoon of Saturday, November 22, 2008. At about noon that day, Federal regulators met with Citigroup
senior management, who described key details of Citigroup’s proposal. The terms would change
considerably before a deal was ultimately finalized.
On the afternoon of November 22, 2008, a series of conference calls took place among representatives of
the Federal agencies involved in the decision regarding the manner and method of saving Citigroup.
According to FRBNY President Geithner, “It was almost a continuous conversation with the principals on
all sorts of ideas on how to do it. We were guided by two objectives: One, we needed a definitive strategy
that would work, and, two, we had to do it in a way that would be most economical and fair for the U.S.
Government and protect its interests.” In addition to Citigroup’s proposal, they discussed several other ideas
to address the lack of market confidence in Citigroup, including:








Creating a conservatorship similar to those for Fannie Mae and Freddie Mac43 – This approach
was rejected because the Government did not want the market to perceive that the Government had
nationalized44 Citigroup, an FRB official told SIGTARP.
Creating a special purpose vehicle (“SPV”) to purchase troubled assets from Citigroup with
Government funds – A special purpose vehicle is an off-balance-sheet legal entity, a corporation to
hold transferred assets that are theoretically beyond the reach of the entities providing the assets.
According to participants, this approach was rejected because the Government preferred a solution
that was quick, scalable, and replicable with other institutions. Pricing the highly illiquid assets was
very difficult and time-consuming; in fact, Treasury had announced on November 12, 2008, that it
would not use the remaining TARP funds to make purchases of illiquid mortgage assets, in part due
to the difficulty in solving the pricing issue. In light of this, the SPV option was rejected.
Creating a public-private investment fund to buy troubled or toxic assets from the bank – This
would move the assets off the bank’s balance sheet. According to participants, this approach was
rejected because it was very difficult to price the assets on the balance sheet of Citigroup absent a
reliable secondary market for them.
Additional capital injection – This approach was described by an FRBNY official as “throwing cash
at it.” The consensus among Government officials was that sufficient funds were not available under
TARP at that time to fully address Citigroup’s problems, and that a lesser amount would not be
sufficient, as evidenced by its need for assistance after the initial $25 billion CPP fund infusion. It
was determined that some injection was necessary, and Citigroup did receive an additional $20
billion in TARP funds.

financials and loss projections, which might be reverse-engineered from the Financial Impact page and the Ring-Fenced Assets
and Expected Losses page, is proprietary information. SIGTARP, without endorsing Citigroup’s claims, has decided not to
include the Financial Impact page or the Ring-Fenced Assets and Expected Losses page of the Citigroup proposal in this report.
43
As conservator of Fannie Mae and Freddie Mac, Treasury provides support to these institutions for an indefinite period of time
while the newly created Federal Housing Finance Agency closely oversees the operations of the companies.
44
Nationalization is the act of taking private assets into public ownership by a national government or state.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

19

Government Response
The Government’s representatives ultimately decided that a further cash infusion and some form of
guarantee for a defined pool of assets would best address threats to Citigroup’s viability. An FRBNY
official noted that Citigroup’s idea of a guarantee would keep the asset portfolio on Citigroup’s books but
the assets would be identified and the Government would monitor them. In addition, the asset pool option
would cost the Government far less money than purchasing the assets outright. The Government also felt
that this approach could be replicated for other institutions that came under similar pressures.
Over the weekend of November 22-23, 2008, representatives of the Federal agencies negotiated terms for
Citigroup that were acceptable to all Government parties. An FRBNY official told SIGTARP that the
Government sought to calm the global markets with decisive action before markets opened in Asia when the
weekend was over. As the weekend drew to a close, the Government offered Citigroup a package that
included a Government guarantee of distressed assets and additional capital assistance.

Government Guarantee of Distressed Assets
In response to Citigroup’s proposals, the Government ultimately agreed to guarantee possible losses to a
ring-fence or pool of assets of roughly $300 billion – but only if Citigroup would be responsible for the first
$37 billion of losses, which was approximately what the Government “pegged” as the expected loss for the
ring-fence and is described below. According to OCC officials, this assistance was intended both to
strengthen Citigroup and to help prevent a further decline in confidence in the market from spreading
throughout the financial system and the global economy. In the action memorandum that described
Citigroup as a systemic risk, Treasury staff noted the concern for protecting FDIC’s insurance fund:
“Providing guarantees for the asset pool as described for these insured institutions and their holding
company is an appropriate mitigation tool as it will facilitate lending and will help stabilize this bank
organization and also be beneficial to the Nation’s financial stability, protect the Fund from unnecessary
losses, and therefore be beneficial to the taxpayers.”
Over the course of the weekend, Government officials obtained details regarding the proposed assets in the
$306 billion pool. Citigroup had estimated that the pool had embedded credit losses45 of approximately
$29 billion over the 10-year life of the agreement. Using financial modeling techniques and bank examiner
estimates, on-site interagency Government staff analyzed information on the proposed asset pool and
developed an initial regulatory estimate of embedded credit losses of $38 billion. This estimate was further
refined, resulting in an estimated loss position in the portfolio of somewhere between $34.6 billion in a
moderately adverse scenario and $43.9 billion in a severely adverse scenario. Based upon these two adverse
loss projection scenarios, the Government pegged the expected loss for the ring-fence at $37 billion.
FDIC maintained that Citigroup should take a first loss position equal to 110% of the initial regulatory
estimate of embedded credit losses, or $42 billion, before the agency would start to cover losses. This point
was taken into consideration as the Government parties discussed the structure and order of the Government
loss positions. FDIC told SIGTARP that it found Citigroup’s ultimate first loss position of $37 billion
acceptable because Treasury was willing to take a $5 billion second loss position through TARP. FDIC
would not cover losses until 110% of the initial regulatory loss estimate, or $42 billion, was reached.

45

Embedded credit loss is defined by FDIC as the total amount of future credit losses a pool of assets will incur, including losses
covered by any associated loan loss reserves as well as losses in excess of reserves.

20

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

By January 15, 2009, after further analysis, asset substitutions, and exclusions, Citigroup’s first loss position
was increased to $39.5 billion. This loss position reflected $1.5 billion in additional reserves associated with
the assets substituted into the pool and $1 billion as consideration for the removal of hedges from the pool.
The Government ultimately would set Citigroup’s first loss position at $39.5 billion,46 which was more than
the expected losses. The Government acted to further protect taxpayer interests by requiring Citigroup to
absorb 10% of any losses in excess of $39.5 billion, with the Government assuming liability for the
remaining 90% of any losses. The responsibility for reimbursing that 90% would be divided among
Treasury, FDIC, and FRBNY (see Table 1). Treasury would use TARP funds to guarantee the second loss
position by absorbing 90% of the next $5.6 billion, or $5 billion, of losses exceeding the initial
$39.5 billion. Citigroup would absorb the remaining $0.6 billion of those losses, resulting in a maximum
TARP payout of $5 billion. For the third loss position of $11.1 billion, FDIC would absorb 90% of losses,
or up to $10.0 billion, with Citigroup covering the remaining $1.1 billion.
If these losses were realized, the remaining assets in the covered pool would serve as collateral for an
FRBNY loan to cover the additional losses and that would be issued to Citigroup at 90% of the collateral’s
value. The FRBNY loan was non-recourse, meaning that if Citigroup’s losses were such that the remaining
value of the asset pool became insufficient to cover the FRBNY loan, Citigroup would not have been
obligated to repay FRBNY the full balance of the loan. Instead, FRBNY would have received ownership of
the impaired assets. FRB Chairman Bernanke told SIGTARP that when he agreed to the transaction, he did
not expect FRB would ever have to pay for any losses because of the structure of the first, second, and third
loss positions.
TABLE 1

U.S. GOVERNMENT GUARANTEES AND LOSS PROTECTIONS TO CITIGROUP
($ Billions)

Citigroup

Loss 1

Loss 2

Loss 3

Non-recourse
Loan

Total

$24.5

$65.7

$39.5

$0.6

$1.1

Treasury (TARP)

--

$5.0

--

--

$5.0

FDIC

--

--

$10.0

--

$10.0

FRBNY

--

--

--

$220.4

$220.4

$39.5

$5.6

$11.1

$244.8

$301.0

Total

Note: Numbers affected by rounding. According to the Federal Reserve, Citigroup’s loss position is “exclusive of reserves.”
Sources: Citigroup Master Agreement, 1/15/2009; Federal Reserve, 1/29/2009.

The Government’s representatives also calculated “premiums” to be paid by Citigroup to Treasury and
FDIC for their guarantees of the asset pool. While the “expected loss” was $37 billion, there remained a
chance that the loss would be higher and thus required the Government to make good on its guarantee.
Using financial models and actuarial analyses, the Government determined that Citigroup should issue
$7.059 billion in perpetual preferred shares, paying 8% annual dividends, as a premium to be divided
46

Indeed, as discussed more fully below, the final agreement allowed the Government to increase this deductible amount at the
time of finalization if expected losses on the portfolio exceeded $39.5 billion.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

21

between Treasury and FDIC47 for the guarantee. Based on their relative loss positions and the size of their
guarantee, Treasury would receive $4.034 billion in shares, while FDIC would receive $3.025 billion. In
addition, Treasury would receive warrants to purchase 66,531,728 shares of common stock at a price of
$10.61 per share.

Additional Capital Injection
Having decided that an additional capital investment in Citigroup was necessary, Government
representatives discussed the amount of capital to inject into the firm, as well as the form the capital would
take. While the capital injection could not directly affect Citigroup’s liquidity in the short term, because the
capital would not be transferred until December, the announcement of a planned capital injection and other
assistance would reassure counterparties that the Government would not let Citigroup fail. With such
assurances, Citigroup’s counterparties could be expected to relax the terms of loans to Citigroup and make
more funds available to Citigroup in the short term. On Saturday evening, November 22, 2008, FRB
Chairman Bernanke and Secretary Paulson discussed the merits of structuring the capital as a common or
preferred equity investment.
Initially, Chairman Bernanke raised the idea of a common equity investment. However, Secretary Paulson
supported preferred equity, arguing that injecting preferred equity into Citigroup would not dilute common
shareholder equity or carry the political implications surrounding a major Government ownership stake in
Citigroup. A senior FRB official also believed at that time, he told SIGTARP, that nonconvertible preferred
shares (preferred shares that could not be converted into common shares) would deter complaints of bank
nationalization, which could have undermined confidence rather than restored it. Preferred equity, which is
senior to common equity in the event of liquidation, also theoretically had a greater likelihood of repayment
than common equity, thus affording the taxpayers some additional protection, and earned an obligation from
Citigroup to make quarterly dividend payments.
Citigroup Vice Chairman Kelly told SIGTARP that Citigroup was not involved in any discussions about the
$20 billion of additional TARP capital to be invested by Treasury. CEO Pandit told SIGTARP that the
capital infusion was not requested by Citigroup, but that it was suggested by “Washington” at the tail end of
Citi Weekend. Infusing capital into Citigroup, an FRB official said, “was a clever way for the government
parties to provide more protection and be more protected themselves.” Put another way, injecting TARP
capital into Citigroup would provide an increased reserve cushion to allow for losses or the guaranteed
assets to be absorbed by Citigroup, and, potentially, by TARP. Furthermore, the potential loss of an
additional $20 billion in TARP funds was viewed as far less than the cost to the financial system of a
Citigroup failure.
Secretary Paulson told SIGTARP that he made the final decision as to the form and amount of the capital
injection – $20 billion of preferred capital that required an 8% annual dividend, payable quarterly.
Secretary Paulson stated that he did not perform any analysis specific to Citigroup in arriving at the
$20 billion figure. Rather, he took into consideration the limited amount of TARP funds still available, as
well as the prospect that another bank could soon need assistance. SIGTARP found no written
47

FDIC’s Associate Director of the Large Institutions Group noted that if the guarantee were worth more than the compensation
for the guarantee when FDIC first booked the transaction, then FDIC would have to make a special assessment of the industry
to recoup the cost. FDIC wanted to avoid this action because the nation’s banks were already under severe financial stress.
FDIC told SIGTARP that a special assessment would also be made if the ultimate cost of the guarantee exceeded the
compensation.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

22

documentation of the decision-making process behind the $20 billion capital injection. FRBNY President
Geithner also told SIGTARP he did not recall exactly how the Government arrived at the $20 billion figure,
but it came through a mix of FRBNY and Treasury discussions. He stated “there’s no perfect science to this
thing…You need to balance risk versus what the firm needs, but it was Treasury’s money.” As part of the
program that would later become known as TIP, Treasury would provide $20 billion in capital to Citigroup
on December 31, 2008, and in return receive $20 billion in preferred stock and warrants to purchase
common stock.

Citigroup Receives the Government’s Term Sheet
On the afternoon of November 23, 2008, Government representatives returned a term sheet (see Appendix
J) to Citigroup that reflected the asset guarantee and additional capital assistance described above. It
differed substantially from the original Citigroup proposal. Citigroup executives were concerned that the
Government’s terms were very expensive in light of the amount of assistance provided, and Vice Chairman
Kelly noted that “many people” in Citigroup’s management recommended against accepting the proposal.
Nevertheless, Citigroup ultimately agreed to the terms late Sunday night. According to Vice Chairman
Kelly, Citigroup accepted the deal because it provided substantial capital relief by reducing the company’s
total risk-weighted assets and strengthening the company’s key capital ratios. Kelly further emphasized that
the deal would dramatically improve the market’s perception of Citigroup’s viability.
Citigroup CEO Pandit also told SIGTARP that, in his view, the purpose of the Government assistance was
to help restore market confidence in Citigroup. On Sunday, November 23, 2008, at 11 p.m., Treasury
released a joint statement with the Federal Reserve and FDIC describing the package of guarantees and
capital (see Appendix D for the complete text of the statement). See Figure 4 below for a depiction of what
Citigroup proposed to the Government early on the morning of Saturday, November 22, 2008, compared to
what the Government’s term sheet proposed when provided to Citigroup on Sunday, November 23, 2008.
An FRBNY official noted that the timing for an agreement was crucial, as Citigroup had to announce that
the Government was guaranteeing the tail risk, or unknown losses, of the assets before the markets opened
in Asia between 7 p.m. and 8 p.m. EST. According to the official, the term sheet worked by “convincing
the skittish market that the Federal Government was taking the risk, even though the risk really remained
with Citigroup,” because the Citigroup loss position was greater than anticipated losses. While the parties
failed to meet that deadline, the announcement was made within hours of the opening of the Asian markets.
On November 24, 2008, the first trading day after the Government announcement, several market indicators
reversed their adverse trends from the previous week. For example, Citigroup’s stock price increased from
$3.77 to $5.95 a share, temporarily reversing the stock’s downward trend. At the same time, Citigroup’s
credit default swap spread, or the price of insuring its debt, declined from 4.6% to 3.6%.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

23

Continuing Concerns About Citigroup
Not all Government participants were convinced that the Government’s proposed plan would be sufficient.
“I don’t think this [additional assistance] is going to fix Citi. And unless you figure out a way to stabilize
the situation, we are going to be back in here writing more checks,” FDIC Chairman Bair noted during the
FDIC Board systemic risk discussions about Citigroup on November 23, 2008. “We all need to be realistic
about some of the underlying problems at this institution. It’s not just because the market is having
problems; this institution has some problems very specific to itself…We all need to work together on how
we need to fix that.”
Citigroup’s problems had been well documented by its regulators prior to Citi Weekend. A Memorandum
of Understanding (“MOU”) with Citigroup, written by FRBNY and dated May 27, 2008, required Citigroup
to create a risk management plan. This required Citigroup to, among other things, “strengthen risk
monitoring practices and management information systems that identify and measure on- and off-balancesheet risk exposures to ensure accurate, timely, and frequent reporting of information to the board of
directors and senior management….” This was to include, but not be limited to, “risk exposures of the
business lines; aggregation of risks on a consolidated basis across all business lines and activities; reports on
deviations from established risk limits and risk management objectives; reports on new and emerging risks;
and reports to identify adverse trends.” Also, OCC had, and continues to have, a comprehensive MOU
(signed June 10, 2008) with Citibank including required upgrades to risk management. Even several
months after Citi Weekend, regulators continued to express concern about Citigroup. In an email to
Citigroup’s regulators on February 22, 2009, Chairman Bair emphasized FDIC’s view that Citigroup
required “greater senior management bank experience” and the need for management changes “at the top of
the house.”

24

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

FIGURE 4

CITIGROUP’S PROPOSAL VS. GOVERNMENT’S TERM SHEET

Citigroup Proposal (November 22, 2008)
Non-Cash

Cash

• $306 Billion Asset Pool Guarantee.
• Government to accept 100% of losses on asset pool.
• Government to receive compensation for the guarantee in the
form of $20 billion in preferred shares with a 5% dividend,
redeemable at Citigroup’s option in five years as cash or common
stock.

No
Capital
Infusion

Government Term Sheet (November 23, 2008)
Non-Cash
• $306 Billion Asset Pool Guarantee.
• Citigroup to accept the first loss position with a deductible of $29
billion plus existing reserves, for a total of $37 billion. Losses in
excess of Citigroup’s deductible shared by the Government (90%)
and Citigroup (10%). Treasury to accept the second loss position
up to $5 billion. FDIC to accept the third loss position up to $10
billion. FRBNY to provide a non-recourse loan equal to the 90% of
the value of the remaining assets in the pool at the Overnight
Index Swap Rate plus 300 basis points after the first $56 billion in
losses.
• Government to receive a premium of $7 billion in preferred
shares with an 8% dividend.

Source: Citigroup email to FRB.

Cash

$20 Billion
Capital Infusion
(in the form of
preferred stock
with an 8%
dividend)

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

25

Changes to the Guaranteed Portfolio and Conversion of the
Government’s Preferred Stock
This section discusses how the Government’s asset criteria affected the composition of Citigroup’s asset
pool. The timeframe for finalizing the asset pool was governed by the Asset Guarantee Program’s Master
Agreement, which was signed on January 15, 2009. This section also discusses Treasury’s decision to
modify its original agreement and allow Citigroup to convert the preferred stock Treasury received from
Citigroup into a combination of common stock and trust preferred securities.
After the Government and Citigroup announced their preliminary agreement on the framework of the
$306 billion asset pool guarantee on November 23, 2008, the parties still needed to negotiate and sign a
Master Agreement and agree upon the assets covered by the guarantee. Citigroup analyzed the asset pool
that it had proposed over Citi Weekend and set its value at $307.2 billion. In subsequent discussions, the
Government defined a set of criteria, which it called “filters,” that qualified individual assets for the
guaranteed portfolio. Application of these criteria, along with accounting adjustments, led to approximately
$100 billion in changes from the originally proposed asset portfolio.
From November 24, 2008, through December 6, 2008, the Government agencies discussed with each other
the unique concerns that they had, including the intent, previously discussed with Citigroup, to exclude
foreign assets from the pool, and determined a collective strategy for concluding a Master Agreement with
Citigroup. An FRBNY official noted that during the initial meeting in person with Citigroup officials on
December 6, 2008, the Government instructed Citigroup to await documentation of the specific terms of the
agreement, and noted that the Government would allow little if any negotiation of the terms.
On December 23, 2008, the Government’s representatives provided Citigroup with a draft of the asset pool
agreement. According to Citigroup, although it had already started discussing asset criteria with the
Government, this was the first time Citigroup received any written guidance on the types of assets eligible
for the guaranteed pool. The asset criteria in the draft agreement specified that:
1. each asset be owned by a Citigroup affiliate and have been included on its balance sheet as of the
beginning of Citi Weekend (November 21, 2008);
2. no foreign assets could be included;
3. no equity securities (such as shares of stock in other entities) or derivatives of such equity securities
could be included;
4. all assets in the pool were to have been issued or originated before March 14, 2008; and
5. Citigroup and its affiliates could not be the obligor48 of any assets.
Later, a sixth criterion was added: “The assets were not to be guaranteed by any Governmental authority
pursuant to another agreement.” Based on these criteria, Citigroup performed an iterative asset-swapping
48

An obligor is the person or entity who owes an obligation to another, as one who must pay a promissory note.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

26

process that occurred mostly before the execution of the definitive agreement on January 15, 2009.49
During this process, with the review and approval of the Government, Citigroup removed assets that had
originally been designated for the pool and replaced them with other assets. Driven by the criteria (as well
as by what Citigroup excluded for other reasons50 and accounting adjustments), these substantial changes to
the composition of the pool reduced the value of the pool from $307.2 billion51 to $300.79 billion (see Table
2 below). The majority of the approximately $102.16 billion of asset reductions from the original
Citigroup-proposed asset pool were assets considered ineligible per the Government’s criteria. These assets
were replaced with $95.75 billion of new assets. During this screening and replacement, the Government
initiated a due diligence review52 to gain comfort with Citigroup’s processes and hired
PricewaterhouseCoopers LLP (“PwC”) and BlackRock for that purpose.
TABLE 2

CHANGES TO ASSET POOL BETWEEN 11/21/2008 AND 1/15/2009
($ BILLIONS)

Citigroup Initial
Proposal
$307.20

Asset Pool
Reductions

Assets Added to
Pool

1/15/2009 Pool

$(102.16)

$95.75

$300.79

Source: Citigroup.

After January 15, 2009, according to data provided by Citigroup officials, accounting adjustments of
replacement asset balances further reduced the pool balance by a net $1.2 billion, and confirmation process
adjustments increased the pool balance by a net $1.35 billion. FRBNY also stated that the Government
objected to, and Citigroup removed, $2.26 billion of assets that failed the Government’s asset criteria.
Citigroup replaced these with $2.26 billion of new assets. In addition, FRBNY told SIGTARP that
Citigroup was permitted to remove an additional net $200 million of assets from the pool because their
inclusion would have been overly burdensome from an operational perspective. While the Government
permitted these removals, it considered them to be voluntary (i.e., excluded for reasons other than failing the
eligible asset criteria) and, therefore, ineligible for replacement. On November 17, 2009, almost one year
after Citi Weekend, and just 36 days before AGP was terminated, the asset pool was finalized at
$300.75 billion.53
49

On January 15, 2009, after consulting with Chairman Bernanke, Secretary Paulson signed a determination, in connection with
Section 3(9)(B) of EESA, which allowed non-mortgage-related Citigroup assets to be eligible for inclusion into the AGP.
50
FRBNY explained to SIGTARP that an overwhelming majority of the excluded assets were excluded because they did not meet
one of the asset criteria (e.g., the date criterion). A small group of CDOs was excluded because Citigroup viewed them as
problematic and believed it did not make business sense to include them because they had been marked down already. The
Government did not allow Citigroup to replace that group of excluded CDOs with other assets.
51
According to the terms of the January 15, 2009, Master Agreement, the size of the asset pool was limited to $301 billion.
52
FRBNY signed contracts with the accounting firm PricewaterhouseCoopers (“PwC”), effective December 1, 2008, and the
asset management firm BlackRock, effective December 14, 2008, to perform due diligence procedures on the assets comprising
the asset pool in accordance with the terms of the Master Agreement. PwC was primarily responsible for examining
Citigroup’s valuation processes and testing assets in the ring-fence for compliance with the Government’s asset criteria.
BlackRock performed loss projections on assets in the pool under a variety of different economic scenarios to determine
whether Citigroup’s $39.5 billion deductible (i.e., first loss position) was adequate. The size of the asset pool and time
constraints required extending the review process beyond the date on which the Master Agreement was executed.
53
When SIGTARP proposed to publish the final, asset-level, list of assets in the pool, Citigroup objected on the ground that doing
so would negatively affect its ability to sell those assets. Without conceding that Citigroup’s concerns are well-founded,
SIGTARP, in an abundance of caution, has decided to honor Citigroup’s request.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

27

Two criteria were responsible for the majority of asset removals:




Foreign asset criterion – A Federal Reserve official noted that the Government’s representatives
worried about the prospect of political fallout from using public funds to support foreign obligors.54
Furthermore, the Federal Reserve expressed concern about the possible difficulties it could face as a
creditor in perfecting55 its interests in foreign collateral.56
Origination date criterion – The Government excluded all assets originated after March 14, 2008,
as required by Section 102 of EESA.

One OCC examiner told SIGTARP that Citigroup did not have sufficient information from its computer
systems about all the assets, and did not have the capacity to readily aggregate global data. As a result,
Citigroup was not able to provide regulators with effective information about all of the assets during the
initial review over Citi Weekend. Nor was it subsequently able to determine whether some of the originally
proposed assets met the asset criteria. Similarly, PwC told SIGTARP it faced problems testing the asset
pool, particularly in extracting data from Citigroup’s many different computer systems across several
different entities. However, almost one year after Citi Weekend, on November 17, 2009, the Government
was finally confident that the assets that did not meet its criteria had been excluded from the pool.

Citigroup’s Rationale for Including Specific Assets
According to Citigroup officials, Citigroup’s originally proposed asset guarantee pool mainly included
categories of assets that had been the center of negative public and media attention. Generally, the market
was concerned about CDOs, consumer mortgages, commercial real estate, and auto loans. Large portfolios
of loans and securities in these categories therefore made up the majority of the asset pool that Citigroup
originally submitted over Citi Weekend. Within the originally submitted ring-fence pool, Citigroup
generally included entire portfolios of loans and securities, seeking to avoid the perception that Citigroup
was selecting individual bad loans and securities for the pool.57 Table 3 below details the asset class
composition of the originally proposed portfolio and how it had changed by the time the portfolio was
finalized.
In response to the Government-imposed asset criteria and other accounting adjustments, by the time the
asset pool was finalized, Citigroup had removed from the asset pool proposed over Citi Weekend all
$12.17 billion of the proposed CDOs. Citigroup also reduced proposed commercial real estate by
$17.44 billion,58 and reduced proposed loans to auto companies by $24.28 billion.59 Citigroup also removed
$17.09 billion of originally submitted consumer mortgages and replaced them with an additional
$39.21 billion in other consumer mortgages. Ultimately, when the asset pool was finalized at
$300.75 billion in November 2009, approximately $100 billion in changes from the initially proposed assets
had been made. In response to the asset exclusions, Citigroup substituted $98 billion of assets into the pool,
54

EESA did not prohibit purchasing or protecting foreign assets.
Security interest in an asset (mortgaged as collateral) protected from claims by other parties.
56
Exceptions were listed in the Master Agreement’s definition of “Foreign Assets.”
57
One FRBNY official told SIGTARP the Government did not require that Citigroup submit entire portfolios of loans and
securities for the asset pool.
58
The Government criteria and accounting adjustments removed $18.14 billion of the originally submitted commercial real estate,
which Citigroup replaced with an additional $0.70 billion in other commercial real estate, for a net decrease of $17.44 billion.
59
The Government criteria and accounting adjustments removed $24.38 billion of the originally submitted loans to auto
companies, which Citigroup replaced with an additional $0.10 billion in other loans to auto companies, for a net decrease of
$24.28 billion.
55

28

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

drawing the substitutions largely from asset classes perceived to be less risky. For example, Citigroup’s
replacement assets included $39.21 billion of generally higher quality prime-consumer mortgages and
$20.69 billion of commercial loans, an asset class that had not been initially proposed.
TABLE 3

RING-FENCE PORTFOLIO ASSET EXCLUSIONS AND SUBSTITUTIONS

Final November 2009
Pool

Net Changes and
Adjustments

$153.00

$176.49

$175.12

$22.12

$19.70

$16.15

$14.98

$(4.72)

$0

$23.08

$20.69

$20.69

$0

$3.35

$2.75

$2.75

$219.07

$213.53

$40.83

$11.69

$11.66

$(2.67)

Original November
Pool Category
2008 Pool
Consumer Loans and Lending Commitments
Consumer Home Mortgage
Loans
Retail Auto Loans
Commercial Lending

a

Consumer Lending
Total Consumer

($ BILLIONS)

January 15, 2009
Pool

$172.70

Corporate Securities, Loans, and Lending Commitments
Alt-A RMBS and Loans for
b
Securitization

$14.33

CDOs

$12.17

$0

$0

$(12.17)

Commercial Real Estate

$36.95

$19.91

$19.51

$(17.44)

Financing to Auto Companies

$29.08

$5.73

$4.80

$(24.28)

$0.49

$0

$0

$(0.49)

$4.45

$0

$0

$(4.45)

$8.58

$6.35

$6.08

$(2.50)

$28.45

$38.04

$45.16

$16.71

$134.50

$81.72

$87.22

$(47.28)

$307.20

$300.79

$300.75

$(6.45)

Private Equity
Monoline Insurance Company
c
Derivatives
Structured Investment Vehicles
Prime and Subprime RMBS,
Highly Leveraged Finance, and
Other
Total Corporate
e

Total Ring-Fence

d

Note: Totals may not agree due to rounding.
a
Within Citigroup’s consumer banking category are loans to small and midsize companies.
b
Loans underlying Alt-A mortgage-backed securities typically are made to borrowers with less than full documentation, lower credit scores or
higher loan-to-values or borrowers that fail to meet lenders’ other underwriting criteria.
c
Derivatives receivables from monoline insurance companies hedging Citigroup’s exposure to CDOs. Consistent with the no equities or
derivatives criterion, the final ring-fence did not include monolines.
d
A Structured Investment Vehicle (“SIV”) is a finance company that attempts to profit from credit spreads between long-term assets, such as
asset-backed securities, and short-term liabilities, such as commercial paper.
e
The ring-fence contained $16.4 billion of RMBS in the originally proposed pool and contained $20.6 billion in the final pool.
Source: SIGTARP analysis of data provided by Citigroup in November 2009.

According to a Citigroup official, substituting higher-quality assets for some of the lower-quality assets in
the pool reduced the expected loss of the guaranteed asset pool, by its internal calculations, using
November 2008 assumptions, from approximately $29 billion to $19.6 billion. Although the premium that
Citigroup was paying for the guarantee did not change, from Citigroup’s perspective, the probability that
losses from the pool would exceed Citigroup’s $39.5 billion deductible was substantially reduced, as was
the probability that the Government would pay Citigroup for its losses. One Citigroup official elaborated:
“We were getting less from the Government for the same pay.” However, “we proceeded because we were
stuck with the deal.”

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

29

Confirmation Process Finalizes the Asset Pool
FRBNY told SIGTARP that while there was no statutory or regulatory deadline for completing the Master
Agreement, Citigroup wanted to complete it before its earnings were released in January 2009. A Master
Agreement was signed on January 15, 2009, but according to FRBNY it was not feasible to finalize the
assets in the pool and complete a thorough due diligence review of the assets by then. The Federal agencies
involved expressed concerns over whether they could set the loss positions and pricing appropriately, or
execute final documentation without a conclusive listing of assets in the guaranteed portfolio.
In response to these concerns, the Master Agreement was structured in a way that did not specify the precise
value or composition of the guaranteed asset pool. Rather, it set a post-signing process for negotiating and
finalizing those details, called the confirmation process. More than 10 months passed between the signing
of the Master Agreement on January 15, 2009, and finalization of the asset pool on November 17, 2009.
The Master Agreement governed the confirmation process, and according to its terms, the composition of
the asset pool was subject to final confirmation by the Government. The Master Agreement included the
following terms as to timing:






After signing the Master Agreement on January 15, 2009, Citigroup had until April 15, 2009, to
provide an asset list to the Government agencies for approval.
The Government had 120 days, from April 15, 2009, until August 13, 2009, to complete its review
of the asset pool.
From that point, Citigroup had 30 days, until September 12, 2009, to review the assets that the
Government objected to and notify the Government of any disagreements. Citigroup and the
Government had another 30 days, until October 12, 2009, to discuss and resolve the disagreed upon
assets.
Citigroup had another 30 days to add assets to the guaranteed asset pool to offset asset decreases
from Government objections or an aggregate change in the asset pool’s value.

The parties met all but the final deadline:





On April 15, 2009, Citigroup delivered a list of $300.95 billion in assets.
On August 13, 2009, the Government provided Citigroup with a listing of roughly $2 billion of
assets that it said did not meet the asset criteria.
On October 9, 2009, Citigroup delivered a final listing of assets to the Government.
On November 17, 2009, the Government finalized the composition of the guaranteed portfolio.

According to Government officials, the Master Agreement provided 10 months for the asset confirmation
process because considerable time was required to verify individual assets’ terms on the almost $301 billion
ring-fence asset pool, compare them against the specified asset criteria, and perform the necessary due
diligence.
FRBNY contracted with PwC and BlackRock to perform asset eligibility testing and valuation procedures
on the asset pool. PwC was responsible for testing the assets in the ring-fence for compliance with the
Government’s asset criteria, and BlackRock performed loss projections on assets in the ring-fence under a
variety of different economic scenarios to determine whether Citigroup’s $39.5 billion deductible (i.e., first
loss position) was adequate. PwC and BlackRock performed most of this due diligence during the
confirmation process between December 2008 and April 2009.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

30

PwC’s first objective was to understand the asset valuation control environment at Citigroup. PwC officials
stated that they tested whether “the assets existed, jibed with records, and reported losses accurately,” and
that PwC ultimately determined that Citigroup’s valuation process was reasonable. The second objective of
PwC’s engagement examined the governance practices Citigroup was to employ with the guaranteed assets.
Governance, PwC officials told SIGTARP, meant the “policies, procedures, and people” that controlled the
assets in the ring-fence, as well as various monthly and quarterly reporting requirements. PwC’s third
objective was to test the majority of proposed assets against eligibility criteria (e.g., foreign asset exclusions
and origination date requirements). This testing took place between January 16, 2009, and April 15, 2009,
after the vast majority of asset substitutions had occurred. PwC reported that during this stage of the review,
it did not encounter any material instances where Citigroup’s assets conflicted with the asset criteria.60
FRBNY engaged BlackRock to project the possible losses for the finalized asset pool, estimating both the
expected losses (called the base scenario) and a more severe loss level that was less likely to occur (called
the stress scenario). An FRBNY official told SIGTARP that the first loss projection agreement with
BlackRock covered all work through the finalization of the asset pool on November 17, 2009. An
amendment to the first agreement was subsequently negotiated in order to cover ongoing loss projections,
made on a quarterly basis, after the finalization of the asset pool.61
On March 5, 2009, BlackRock reported loss projections of $32.7 billion under a base scenario and
$50.8 billion under a stress scenario based on the asset pool delivered as of January 15, 2009.62 An FRBNY
official told SIGTARP that FRBNY felt comfortable with Citigroup’s $39.5 billion deductible based on
these projected losses, which suggested that even under a stress scenario, while Treasury and FDIC would
be exposed to losses, FRBNY would not. After this report, BlackRock continued to work on loss
projections for the final asset pool. The FRBNY official stated that if the Government saw that “things had
changed,” based on BlackRock’s final pool loss projections, the Master Agreement allowed the Government
one immediate opportunity to either increase Citigroup’s deductible to more than $39.5 billion, change the
assets in the pool to get a pool with loss projections that support a $39.5 billion deductible, or increase the
compensation Treasury and FDIC received in exchange for their loss positions. According to the official,
the asset guarantee was terminated before BlackRock completed its loss projection on the finalized asset
pool, and FRBNY informed BlackRock to discontinue its loss projection process on December 14, 2009,
and formally terminated its contract on December 23, 2009.

Citigroup and Treasury Agree to Exchange Preferred Securities for Common and Trust
Preferred Securities
Even after the Government invested an additional $20 billion of preferred equity on December 31, 2008,
under what became known as TIP, Citigroup’s stock price continued to decline (see Figure 5), and fell
below a dollar per share in March 2009. According to OCC examiners, the market viewed the $45 billion of
TARP preferred equity as the equivalent of debt and wanted Citigroup to be infused with common equity.

60

Treasury also performed some independent verification on the final asset pool separate from PwC. Treasury’s additional
review compared the changes from the April 15, 2009, ring-fence asset pool listing to the final asset pool listing, and
substantiated the information received from PwC.
61
The quarterly loss projection engagement was rendered moot when the Citigroup portfolio guarantee agreement was terminated
December 23, 2009.
62
During Citi Weekend, on-site interagency staff estimated embedded credit losses of the asset pool to be $38 billion.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

31

FIGURE 5

CITIGROUP STOCK PRICE (OCTOBER 31, 2008 – JUNE 30, 2009)

Citigroup Share Price

$16
$14
$12
$10
$8

February 27, 2009: Citigroup
announced its agreement with
Treasury to convert $25 billion of
preferred stock, obtained
through CPP, to common stock.

$6
$4
$2
$0

Note: Citigroup’s stock price bottomed out on March 5, 2009, at $0.97 per share.
Source: SIGTARP analysis of Citigroup data.

Citigroup and Treasury each announced on February 27, 2009, that to bolster Citigroup’s Tangible Common
Equity (“TCE”)63 without additional monetary assistance, Treasury had agreed to exchange up to $25 billion
of preferred stock obtained under CPP for common stock at $3.25 per share.
The agreement was entered into on June 9, 2009, and the exchange took place on July 23, 2009, and July 30,
2009, with Treasury receiving $25 billion of Citigroup common stock equivalent. This common stock
equivalent converted to 7,692,307,692 shares of common stock. After the exchange was completed,
Treasury was the largest single shareholder of Citigroup, holding approximately 33.6% of Citigroup
common stock. A more detailed description of the decision-making process that led to the conversion of the
preferred shares of stock that Treasury received through CPP to common equity will be included in
SIGTARP’s upcoming audit on the CPP exit process.
In addition to the exchange of $25 billion of its preferred shares obtained under CPP, on July 30, 2009,
Treasury also exchanged its preferred stock investment in Citigroup acquired under TIP and AGP for new
trust preferred securities,64 which strengthened some of Citigroup’s key capital ratios. According to
Treasury, the new securities had “greater structural seniority” than the existing preferred stock; for example,
they had a more senior claim in bankruptcy and Treasury would continue to collect its dividend. They paid
an annual coupon rate of 8% and were scheduled to mature in 2039.

63

TCE, as defined by Citigroup, represents common equity minus goodwill and intangible assets, other than Mortgage Servicing
Rights, net of related deferred taxes. Other companies may calculate TCE differently.
64
A trust preferred security is a security that has both equity and debt characteristics, created by establishing a trust and issuing
debt to it.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

32

After the exchanges, Treasury’s holdings of Citigroup securities consisted of the following:

65



Capital Purchase Program Investment: The preferred shares worth $25 billion (25,000 preferred
shares at $1 million per share) obtained through CPP were converted into $25 billion in Citigroup
common shares (approximately 7.7 billion common shares at $3.25 per share); Treasury also still
held the original warrants it had received under CPP to purchase 210,084,034 common shares at a
strike price of $17.85 per share.



Targeted Investment Program: The Citigroup preferred shares worth $20 billion obtained through
TIP were converted into $20 billion of Citigroup trust preferred securities; Treasury also still held
the original warrants it had received under TIP to purchase 188,501,414 common shares at a strike
price of $10.61 per share.



Asset Guarantee Program Investment: The Citigroup preferred shares worth $4.03 billion
obtained through AGP were converted into trust preferred securities; Treasury also still held the
original warrant it had received under AGP to purchase 66,531,728 common shares at a strike price
of $10.61 per share.65

FDIC’s $3.025 billion in preferred shares were similarly converted to trust preferred securities.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

33

Citigroup’s Request to Leave TIP and AGP
This section presents the events between September 11, 2009, and December 31, 2009, and the basis for the
Government’s decision to allow Citigroup to repay TIP and terminate AGP.
The conditions of Citigroup’s TIP repayment were governed, in part, by the American Recovery and
Reinvestment Act of 2009, which provides that once an institution notified Treasury that it wanted to repay
its TARP investment, Treasury had to permit repayment, after consulting the appropriate federal banking
agency. According to Treasury guidance, financial institutions seeking to repay TARP are subject to the
existing supervisory procedures for approving redemption requests for capital instruments. When assessing
a redemption request, bank regulators consider the institution’s soundness, capital adequacy, and ability to
lend. Regulators also confirm that the institution has a comprehensive internal capital assessment process.
Only after regulators are convinced that a TARP recipient is ready to redeem outstanding preferred stock
will they permit a bank to do so.
FRBNY is the supervisor of Citigroup and had the responsibility to review Citigroup’s repayment proposal,
while FRB had final approval authority. The primary method that FRBNY ultimately used to determine
Citigroup’s condition was a stress test akin to one performed in the Supervisory Capital Assessment
Program (“SCAP”) in March 2009 and April 2009 (see box). FRB also obtained recommendations from
other regulatory agencies, such as FDIC and OCC, on whether to approve or reject Citigroup’s request to
redeem its Treasury capital. On September 11, 2009, Citigroup CEO Pandit met with FRBNY President
William Dudley and other officials to discuss
repayment of the TIP investment. The purpose of the
Supervisory Capital Assessment Program
meeting was for Citigroup to present its financial
In early 2009, Treasury and the Federal Reserve
condition, including the results of an internal
announced that the Government would test the
Citigroup stress test. While Citigroup’s presentation
economic health of Citigroup and 18 other bank
offered material information about its financial
holding companies to judge whether they had
condition, FRB concluded that the information was
enough capital to withstand losses while
not of sufficient depth to determine whether or not
continuing lending, even in a worsening
Citigroup was in a condition to repay TIP and
economy. SCAP “stress tests” used two
terminate AGP. Following this meeting – and largely
macroeconomic scenarios: one in which the
because of it – FRB took steps to perform a second
crisis continued as most economists were
stress test, carried out largely by FRBNY, with the
projecting at that time, and one in which the
intent of completing it by late November 2009 in time
crisis worsened beyond most projections.
for Citigroup to be able to execute in mid-December
the capital raise that would be needed to repay the TIP
According to FRBNY officials, AGP guarantees
investment and terminate AGP.
had little effect on how Citigroup fared in the
tests. The tests estimated that under the more
Following Citigroup’s September 11 meeting, FRB
adverse scenario, Citigroup would require an
told Citigroup to wait until the agency had issued
additional $5.5 billion in common equity.
additional guidance to all bank holding companies,
Citigroup ultimately met the $5.5 billion
including Citigroup, which had participated in the
additional capital condition in a pre-existing
original SCAP stress tests and were still in the TARP
capital exchange program, which was executed
program. On October 20, 2009, and October 23,
in July 2009.
2009, Secretary Geithner met with FRB Chairman
Bernanke, FDIC Chairman Bair, OCC Comptroller

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

34

Dugan, FRBNY President Dudley, and other representatives of the federal financial regulatory agencies and
discussed guidance on the terms of repayment for the SCAP institutions remaining in TARP, as well as the
financial conditions of those institutions.
On November 3, 2009, FRB issued additional guidance66 that detailed the steps a recipient had to take to
repay its TARP assistance. The guidance included maintaining sufficient capital levels after repaying
Treasury and demonstrating the ability to access long‐term debt markets without the use of FDIC’s
Temporary Liquidity Guarantee Program (“TLGP”).67 The guidance also stipulated that recipients could
expedite their repayments by agreeing to raise at least $1 of new common equity for every $2 of Treasury
capital redeemed. On November 5, 2009, an FRBNY official met with Citigroup CEO Pandit and
Citigroup’s Chief Financial Officer. During this meeting, the FRBNY official informed Citigroup
management that Citigroup would have to repay its TIP capital with a larger proportion of newly raised
common equity than other SCAP bank holding companies.
On November 9, 2009, FRBNY and others from the Federal Reserve System began performing a repayment
stress test on Citigroup to determine the strength of its financial condition. FRB would ultimately use the
results of this stress test to decide whether to accept or reject the proposals later made by Citigroup to exit
TIP and AGP. The repayment stress test used the format and process of the original SCAP stress test, but
several data inputs were updated. For example, the original SCAP stress test used Citigroup financial data
as of December 31, 2008, while the repayment stress test used financial data as of September 30, 2009. The
worst-case unemployment rate used in the stress test was increased from 10.4% to 11.1% to reflect an
increase in the actual unemployment rate from 8.9% in April 2009 to 10% in November 2009. While actual
housing prices had risen during that period, the worst-case forecast for housing prices in the repayment
stress test was maintained at the same level used in the SCAP stress test.

Factors Leading to Citigroup’s Proposal for TARP Redemption
Several motivations have been suggested for Citigroup’s decision to repay its TIP funds when it did. Some
of these factors, such as restrictions on executive compensation, had been present since the inception of TIP.
An FDIC official told SIGTARP that FDIC believed that executive compensation restrictions were one
reason why Citigroup wanted to exit TIP. If Citigroup repaid the $20 billion TIP injection, Citigroup would
no longer be under the restrictions on its executive compensation for companies under “exceptional

66

In a draft of this report, SIGTARP included as appendices copies of Citigroup’s final proposal to FRB, FRB’s response to
Citigroup repayment proposal, and the additional guidance issued to SCAP participants on November 23, 2009, on exiting
TARP. In commenting on that draft, the FRB strenuously objected to our inclusion of these documents as violative of the bank
supervision privilege and stated that including them, among other things, would create a “loss of trust” in FRB by supervised
entities. While SIGTARP respectfully disagrees with FRB’s prediction of harm and believes that exclusion of the documents
unnecessarily inhibits transparency, in deference to FRB, SIGTARP has removed these documents from the report.
67
The Temporary Liquidity Guarantee Program (“TLGP”) was established in October 2008 to address “disruptions in the credit
market, particularly the interbank lending market, which reduced banks’ liquidity and impaired their ability to lend. The goal of
the TLGP is to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize.” The
program does not rely on the taxpayer or the deposit insurance fund, but is entirely funded by industry fees. Participating
institutions may issue debt under TLGP’s Debt Guarantee Program, which provided an FDIC guarantee of newly issued senior
unsecured debt of participating insured depository institutions and other eligible entities. New guarantees were issued until
October 31, 2009, with the debt being guaranteed until “the earliest of the opt-out date, the maturity of the debt, the mandatory
conversion date for mandatory convertible debt, or December 31, 2012.”

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

35

assistance,” including restrictions set by the Special Master for TARP Executive Compensation.68 An OCC
official said that Citigroup’s risk of losing key employees to other banks because of the restrictions was
“very real.”
Citigroup management also cited executive compensation as a motivating factor. CEO Pandit told
SIGTARP that “keeping the team together…was a big deal for management.” He also told SIGTARP that
some employees in the top tiers of the firm left Citigroup and he acknowledged that executive compensation
restrictions might have been a contributing factor. Citigroup Vice Chairman Kelly told SIGTARP that
executive compensation was a barrier to hiring and retaining qualified managers and well-known traders “in
a narrow sense.” But he also told SIGTARP that improving lower-level employee morale was another
motivation to pay back TIP and terminate AGP. The assistance had led Citigroup employees to ask what
participation in TARP meant for the company’s survival, Kelly said.
A new motivating force arose when Citigroup’s peers remaining in TARP began the process of exiting the
program. On Wednesday, December 2, 2009, Bank of America announced that it would redeem its TARP
capital ($25 billion in CPP and $20 billion in TIP) that same month. According to FDIC officials, Bank of
America’s action was the catalyst for Citigroup to submit its own formal redemption proposal to FRBNY.
OCC officials told SIGTARP that Citigroup’s pressure to repay was “originating unquestionably from the
marketplace” and from Bank of America’s plan to repay its TARP funds. OCC noted that if Citigroup did
not repay its TIP funds soon after Bank of America successfully repaid its TARP funds, then Citigroup
might have suffered from the perception that it was a weaker institution.
Citigroup Vice Chairman Kelly told SIGTARP that Citigroup would have had a “huge competitive
disadvantage” as the “only remaining large commercial bank” that had not repaid TARP. CEO Pandit told
SIGTARP that “having $45 billion from the government had no positive impact on Citigroup’s image,” and
“repaying the $20 billion, getting out of the guarantee, and Special Master, signaled that this bank has a very
strong future.”

Stress Test Results and Resulting Repayment Proposal
On Thursday, December 3, 2009, just one day after Bank of America announced it would redeem its TARP
capital, FRBNY officials presented the results of the recently completed repayment stress test at Citigroup’s
executive offices to Citigroup’s Chief Risk Officer and Chief Financial Officer. Citigroup was then able to
take into account the results of the stress test when planning its proposal to exit TIP and AGP. According to
documents obtained by SIGTARP from FRBNY, the stress test required Citigroup to maintain a Tier 1
Capital ratio of 6.0% and a Tier 1 Common ratio of 4.0% in a forecasted adverse environment. If the stress
test indicated Citigroup could not maintain these ratios, then an additional capital buffer would be needed.
According to FRB, Citigroup would maintain a Tier 1 Capital ratio of 6.6% and a Tier 1 Common ratio of
4.6% if the following occurred:



68

Citigroup raised $21.4 billion through the issuance of common stock;
All $20 billion TIP trust preferred securities were repaid; and
The ring-fence agreement was canceled.

Under the Interim Final Rule on TARP Standards for Compensation and Corporate Governance, Treasury created a new Office
of the Special Master for TARP Executive Compensation (“Special Master”), responsible for the review and analysis of
executive compensation at TARP recipient companies.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

36

According to FRBNY, a dialogue between FRBNY and Citigroup occurred following the December 3,
2009, meeting. The two parties discussed the amount of common equity that Citigroup would be able to
raise in the market environment at that time. On December 9, 2009, an FRBNY official requested written
documentation from Citigroup detailing its repayment proposal. Late that day, Citigroup sent FRBNY a
repayment proposal. This was the first repayment proposal following the November 2009 stress test. The
proposal, and all subsequent proposals, requested to fully repay all $20 billion in Citigroup TIP trust
preferred securities and to terminate Citigroup’s involvement in AGP. Citigroup proposed raising capital
through:





$15 billion in common stock,
$2.25 billion in a common stock overallotment option,69
$2.5 billion in tangible equity units,70 of which $2 billion would count as common, and
$1 billion in employee stock options.

The cumulative common capital to be raised was estimated to be up to $20.25 billion. The proposal had a
pro forma financial summary that depicted the expected impact of the repayment. The proposal stated that
the portion of the $7 billion in AGP trust preferred securities that would be surrendered by the Government
as a result of early termination of the guarantee would be “determined by good faith negotiations at a later
date.” FRBNY responded by informing Citigroup that the capital raise detailed in the proposal did not
contain enough common equity.
On Thursday, December 10, 2009 – one day after Citigroup submitted the previous proposal to FRBNY –
Citigroup submitted a second similar, but more conservative, proposal. The types of capital that Citigroup
hoped to raise were identical, but the amounts were increased to:





$17 billion in common stock,
$2.55 billion in a common stock overallotment option,
$3.5 billion in tangible equity units, of which $2.8 billion would count as common, and
$1.7 billion in employee stock options.

The cumulative common capital raise was estimated to be up to $24.05 billion. Citigroup also reiterated its
suggestion that the portion of AGP trust preferred securities to be surrendered would be negotiated at a later
date. An FRBNY official told SIGTARP that at the time FRBNY considered the amount of capital to be
adequate but was concerned that Citigroup might not be able to fill its overallotment option, which was
dependent on future market demand. In light of this concern, FRBNY informed Citigroup that the next
repayment proposal should include a clause stipulating actions that Citigroup would need to take in the
event the overallotment was not sufficiently filled.

69

An overallotment option, called a “green shoe,” would allow Citigroup’s underwriters to sell more common stock if the initial
amount is sold out. In this case, the overallotment option allows the underwriters to sell up to 15% more than the base
allotment of $15 billion, for an overallotment of $2.25 billion.
70
The tangible equity units consisted of a stock purchase contract and a junior subordinated amortizing note. The stock purchase
contract has a settlement date of December 15, 2012, and will settle for between 25.3968 and 31.7460 shares of Citigroup
common stock. The amortizing notes will pay holders equal quarterly installments of $1.875 per amortizing note, totaling a
7.5% cash payment per year for each $100 of tangible equity units. The final payment is scheduled for December 15, 2012.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

37

On Sunday, December 13, 2009, Citigroup submitted its final proposal to FRBNY. The proposed types and
amounts of the capital raise in this proposal matched the December 10 proposal. Unlike previous proposals,
the December 13 proposal included capital raise conditions and the amount of AGP trust preferred securities
to be surrendered. Citigroup’s proposal included an acknowledgment that “…if the offering of common
stock and tangible equity units do not generate at least $21.3 billion of additional equity capital, the
regulators would expect Citigroup to issue additional trust preferred securities in a ratio of $2 for every $1
the equity raised falls short of $21.3 billion, subject to a minimum equity raise of $19.8 billion, up to a
maximum of $3.0 billion of trust preferred securities during the first quarter of 2010.” Citigroup would
have to fill at least $1.5 billion of the overallotment option in order to satisfy the $21.3 billion requirement.
As described below, Citigroup was not able to fill the overallotment option and ultimately would raise trust
preferred securities in the first quarter of 2010 to meet the capital raise requirements.
The December 13 proposal also included a provision for the Government to surrender $1.8 billion of AGP
trust preferred securities in exchange for early termination of AGP, which resulted from separate
negotiations with Treasury. Treasury told SIGTARP that initially Citigroup proposed a “straight-line
method” by which the Government would surrender a percentage of the AGP trust preferred securities
commensurate with the percentage of the original 10-year term remaining at the date of termination –
roughly 90%, or $6.2 billion. Treasury considered Citigroup’s “straight-line proposal” to be “entirely
unacceptable.”
Instead, the Government took the position that the overwhelming majority of the value of the AGP was in
the first few weeks of its existence, when the guarantee helped Citigroup avoid collapse, and that therefore,
only a small portion of the AGP trust preferred securities should be surrendered. Treasury also told
SIGTARP that it would agree to the terms only if the transaction enhanced the value of its TARP portfolio.
According to Treasury, the terms accomplished this by removing the full liability of Treasury’s $5 billion
loss position in the ring-fence while surrendering less than half of the corresponding $4 billion in AGP trust
preferred securities. Ultimately, the Government and Citigroup came to agree that the Government would
surrender $1.8 billion of the AGP trust preferred securities. Treasury surrendered $1.8 billion out of its $4
billion allocation and may also receive $800 million from FDIC upon Citigroup’s exit from TLGP,
described below.
The Government kept the other $5.3 billion in Citigroup trust preferred securities as payment for its
guarantee of the asset pool for one year. According to the final Citigroup repayment proposal submitted to
FRBNY on December 13, 2009, Citigroup expected a $1.1 billion capital benefit to result from the $1.8
billion in AGP trust preferred securities that the Government surrendered. With this $1.1 billion benefit
added to the expected capital raise of $24.05 billion, Citigroup expected its proposal would generate up to
$25.15 billion in capital to replace the TIP capital. FRBNY and FRB staff analyzed Citigroup’s final
proposal and submitted their analysis to FRB’s Governors.
On Monday, December 14, 2009 – one day after Citigroup submitted its final proposal – FRB sent Citigroup
a letter indicating FRB approved Citigroup’s final request to repay the TIP capital and terminate AGP. The
letter also detailed the conditions Citigroup would need to meet to exit the two programs. On the same day,
a Citigroup press release announced the approval of its repayment of TIP and termination of its involvement
in AGP – just 27 days after the finalization of the asset pool.

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38

On Wednesday, December 16, 2009 – two days after receiving approval for repayment – Citigroup priced
its offering and announced the details of the corresponding capital raise, which Citigroup began executing
that same day (see Appendix G). The press release said that Citigroup planned to issue 5.4 billion common
shares priced at $3.15 per share, and generate proceeds of about $17 billion. Citigroup also announced the
offering of 35 million tangible equity units, priced at $100 per unit. The tangible equity unit offering was to
generate total net proceeds of $3.5 billion (approximately $2.8 billion of which would count as equity
capital). The combined issuance satisfied the minimum initial $19.8 billion capital issuance requirement.
The press release also noted that Treasury agreed not to sell any of its 7.7 billion shares of common stock
for the following 90 days. “The combined offering of common stock and tangible equity units is the largest
public equity offering in U.S. capital market history,” Citigroup said.
On December 23, 2009, Citigroup, Treasury, FDIC, and FRBNY all signed the Termination Agreement for
Citigroup’s participation in AGP. That same day, Treasury and Citigroup also signed an agreement for the
repayment of TIP. The Termination Agreement states: “On December 22, 2009, Citigroup completed an
offering of common stock and mandatory convertible preferred stock as contemplated by the Federal
Reserve Conditional Approval.”
However, Citigroup did not meet the $1.5 billion overallotment option necessary to satisfy the total
$21.3 billion additional equity capital requirement. Instead, Citigroup raised only $0.6 billion from the
overallotment, resulting in a $0.9 billion capital shortfall and a need to raise at least $1.8 billion in
additional trust preferred securities during the first quarter of 2010. Citigroup was required to raise $2 of
trust preferred securities for every $1 it fell short. In March 2010, Citigroup raised $2.3 billion in trust
preferred securities thereby satisfying the capital raise requirement.

TARP’s Remaining Citigroup Investment
On March 16, 2010, Treasury’s agreement not to sell its Citigroup common stock for 90 days expired and
Treasury announced that it would sell the Citigroup common stock it held as a result of its CPP investment.
Treasury had agreed not to sell Citigroup stock during those 90 days to facilitate an equity offering initiated
by Citigroup on December 16, 2009, which enabled Citigroup to raise funds and exit TIP. In exchange for
the 90-day lock-up period, Citigroup agreed to pay all costs associated with the sale of any securities issued
to Treasury by Citigroup or any of its subsidiaries. Treasury hired Morgan Stanley as its capital markets
advisor in connection with its disposition of its Citigroup common stock. On March 29, 2010, Treasury
stated that, under a prearranged written trading plan, it would sell its Citigroup common shares in an
“orderly and measured” fashion over the course of 2010, subject to market conditions. See Table 4 below
for a list of Treasury’s disposition of its entire stake of Citigroup common stock.

39

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

TABLE 4

CPP CITIGROUP COMMON STOCK DISPOSITION, AS OF 12/10/2010
Number of
Shares (Millions)

Date
4/26/2010 to 5/26/2010
5/26/2010 to 6/30/2010
7/23/2010 to 7/31/2010
8/1/2010 to 8/31/2010

a

9/1/2010 to 9/30/2010

a

a

10/19/2010 to 12/6/2010
12/6/2010 to 12/10/2010
Total

b

Average Share
c
Price (Dollars)

Gross Proceeds
($ Millions)

1,500

$4.12

$6,182.5

1,109

3.90

4,322.7

226

4.12

934.0

680

3.85

2,615.0

594

3.91

2,314.5

1,166

4.26

4,967.9

2,417

4.35

10,515.7

7,692

$4.14

$31,852.3

Notes: Numbers may not total due to rounding.
a
Treasury reported in the Monthly 105(a) Report individual figures for July and August for the number of shares, average share
price, and gross proceeds. The 105(a) Report did not report individual figures for September, which are calculated above by adding
number of shares and gross proceeds from July and August and subtracting those figures from total number of shares and gross
proceeds sold from 7/23/2010 to 9/30/2010 as reported in the September 105(a) Report. Average share price for September was
calculated by dividing September gross proceeds by the number of shares.
b
Total amounts appear for Number of Shares and Gross Proceeds. Average Share Price is an average for sales between 4/26/2010
to 12/6/2010.
c
Average price for all sales of Citigroup common stock made by Treasury over the course of the corresponding period.
Sources: Treasury, response to SIGTARP data call, 10/21/2010; Treasury, Transactions Report, 9/30/2010; Treasury, “Troubled
Assets Relief Program (TARP), Monthly 105(a) Report,” 8/2010, Treasury, Transactions Report, 12/8/2010
www.financialstability.gov/docs/105CongressionalReports/August%202010%20105(a)%20Report_final_9%2010%2010.pdf,
accessed 9/29/2010; Treasury, “Troubled Assets Relief Program (TARP), Monthly 105(a) Report,” 7/2010,
www.financialstability.gov/docs/105CongressionalReports/July%202010%20105(a)%20Report_Final.pdf, accessed 9/29/2010;
Treasury, 105(a) Report, 9/30/2010; http://financialstability.gov/docs/transaction-reports/12-810%20Transactions%20Report%20as%20of%2012-6-10.pdf, accessed 12/9/2010, Treasury, 105(a) Report, 12/6/2010.

On September 29, 2010, Treasury entered into an agreement71 with Citigroup to exchange the entire
$2.234 billion in Citigroup trust preferred securities that it held under AGP for new trust preferred
securities. Because the interest rate necessary to receive par value was below the interest rate paid by
Citigroup to Treasury, Citigroup increased the principal amount of the securities sold by Treasury an
additional $12 million and thereby enabling Treasury to receive total gross proceeds of $2.246 billion from
the sale of the Citigroup trust preferred securities, which occurred on September 30, 2010. This sale did not
include the $800 million in AGP trust preferred securities held by FDIC for Treasury’s benefit. FDIC is
required to turn over those securities to Treasury unless it incurs losses on Citigroup debt that was
guaranteed by FDIC under the TLGP. The sale also did not include the warrants for Citigroup’s common
stock that were issued as part of Citigroup’s participation in AGP and other Treasury programs. Any
proceeds from the ultimate sale of those securities will represent additional gains to the taxpayer.

71

As part of its agreement to facilitate the sale of Treasury’s trust preferred securities, Citigroup agreed to either increase the
interest rate on the new trust preferred securities so that Treasury would receive par value for the sale or increase the aggregate
principal amount of the securities to conform to what otherwise would be considered a premium to par, if the interest rate
necessary to sell at par value was below the interest rate paid by Citigroup to Treasury prior to the sale.

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TABLE 5

TREASURY’S CITIGROUP HOLDINGS AS OF DECEMBER 10, 2010
Number of
Shares of
Common Stock

Common Stock
Warrants for
Number of Shares
(Millions)

CPP

-

210.1

AGP
TIP

TARP Program

Trust Preferred
Securities
(at Par Value)

a

-

-

66.5

-

-

188.5

-

b

Note: Numbers affected by rounding.
a
On 6/9/2009, Treasury entered into an agreement with Citigroup to exchange up to $25 billion of
Treasury's CPP investment in Fixed Rate Cumulative Perpetual Preferred Stock, Series H (CPP
Shares) "dollar for dollar" in Citigroup's Private and Public Exchange Offerings. On 7/23/2009 and
7/30/2009, Treasury exchanged a total of $25 billion of the CPP shares for Series M Common
Stock Equivalent (“Series M”) and a warrant to purchase shares of Series M. On 9/11/2009,
Series M automatically converted to 7,692,307,692 shares of common stock and the associated
warrant terminated on receipt of certain shareholder approvals.
b
Treasury is also entitled to receive up to $800 million in TruPS® held by FDIC that FDIC is
required to turn over to Treasury unless it incurs any losses on debt of Citigroup guaranteed by
FDIC under the Temporary Liquidity Guarantee Program.
Source: SIGTARP analysis of data.

According to Treasury, it has realized a profit of approximately $12 billion72 over the course of Citigroup’s
participation in AGP, TIP, and CPP.

72

According to Treasury’s most recent transactions report and dividends and interest report
(http://www.financialstability.gov/latest/reportsanddocs.html), the total amount of cash inflows Treasury has realized to date in
excess of its cash outflows is $12.04 billion. Treasury is also scheduled to receive $800 million in trust preferred securities
from FDIC after it extinguishes the TLGP (reduced by any losses in the program in connection with Citigroup’s participation)
and additional proceeds from selling its Citigroup warrants. The $12.04 billion includes $6.85 billion in CPP gains;
$2.25 billion in AGP proceeds; and $2.94 billion in dividends.

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41

Conclusions
In November 2008, Citigroup teetered on the brink of failure. Even though it had received $25 billion from
TARP’s Capital Purchase Program just weeks earlier, it was the subject of a global run on its deposits, its
stock was in a nosedive as short sellers sought to profit on the market’s perception of its deteriorating
condition, and the cost of insuring its debt in the credit default swap market was increasing at an alarming
pace compared to its peers. Worried that Citigroup would fail absent a strong statement of support from the
U.S. Government, and that such failure could cause catastrophic damage to the economy, then-Treasury
Secretary Henry Paulson and then-FRBNY President Timothy Geithner held a series of discussions with
FRB Chairman Ben Bernanke, FDIC Chairman Sheila Bair, and then-Comptroller of the Currency John
Dugan to discuss bailing out Citigroup. The underlying premise of these discussions was that Citigroup was
too systemically significant to be permitted to collapse. According to Chairman Bernanke, it was “not even
a close call to assist them.”
By late on November 23, 2008, following a frantic few days dubbed by its participants as “Citi Weekend,”
Citigroup had agreed to a Government proposal that would provide Citigroup a package that included asset
guarantees and a $20 billion capital infusion in exchange for preferred shares of Citigroup stock. The
essential purpose of the deal, as Secretary Paulson and FRBNY President Geithner later confirmed to
SIGTARP, was to assure the world that the Government would not let Citigroup fail. After the deal was
announced, the impact on the market’s perception of Citigroup was immediate: its stock price stabilized, its
access to credit improved, and the cost of insuring its debt declined. Citigroup had been saved, at least for
the time being. Just over a year later, Citigroup terminated the guarantee program and repaid the $20 billion
of Government-supplied capital.
SIGTARP found that the Government constructed a plan that not only achieved the primary goal of
restoring market confidence in Citigroup, but also carefully controlled the overall risk of Government loss
on the asset guarantee. Citigroup’s initial proposal, which would have had the Government guarantee 100%
of $306 billion of troubled assets in return for $20 billion in preferred stock, was summarily rejected.
Instead, the Government made a take-it-or-leave-it proposal that required Citigroup to absorb the first $37
billion73 in losses in the asset pool as well as 10% of any losses in excess of that amount in return for
approximately $7 billion in Citigroup preferred stock. The Government’s risk of loss, in other words, was
dramatically less than it would have been under the Citigroup proposal. Indeed, based on various loss
projections, the relevant Government actors – Treasury, FDIC, and FRBNY – believed that Citigroup’s
initial loss position would render any Government loss unlikely. In the end, Citigroup absorbed all of the
losses among the guaranteed assets, which totaled $10.2 billion at the time of the termination of the asset
guarantee, far less than Citigroup’s “deductible.”
As one FRBNY official explained to SIGTARP, the deal was structured to “convinc[e] the skittish market
that the Federal Government was taking the risk, even though the risk really remained with Citigroup,”
because the Citigroup loss position ultimately exceeded anticipated losses. In addition to the asset
guarantee, the Government also insisted on a $20 billion capital injection in return for preferred stock, even
though Citigroup did not request such an injection. Here, too, the focus was on sending a message to
reassure the markets – the Government would not let Citigroup fail.
73

This was later raised to $39.5 billion.

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42

That the Government drove a particularly hard bargain on behalf of taxpayers was reflected in the reaction
of many within Citigroup. Citigroup executives were concerned that the Government’s terms were too
expensive in light of the assistance provided, and some Citigroup insiders recommended against accepting
the proposal. In the end, however, Citigroup accepted the deal, chiefly because of its expected impact on
the market’s perception of Citigroup’s viability.
While the parties announced their preliminary agreement on the framework of the asset pool guarantee on
November 23, 2008, they did not finalize the list of assets covered by the guarantee until almost one year
later. The eventual selection of assets for inclusion in the pool was driven largely by Government-imposed
criteria, the application of which, along with accounting adjustments, led to approximately $100 billion in
changes from the assets originally proposed by Citigroup. These changes had the effect of reducing the
expected loss of the guaranteed asset pool, according to Citigroup’s internal calculations, by over $9 billion.
As a result, the likelihood that the Government would have to cover losses on the guarantee was reduced
even further. As one Citigroup official explained, “We were getting less from the Government for the same
pay, [but] we proceeded because we were stuck with the deal.”
From the perspective of minimizing taxpayer risk on the asset guarantee transaction itself, the deal with
Citigroup looks even better with hindsight. Citigroup did not fail, and the global economy avoided the
catastrophic financial collapse that many feared would flow from a Citigroup failure. And while the
transactions hardly solved all of Citigroup’s problems – just months later the Government was compelled to
significantly restructure its ownership interest in a manner that left Treasury as Citigroup’s single largest
common stockholder – the Government incurred no losses, and even profited on its overall investment in
Citigroup by more than $12 billion. Nevertheless, two aspects of the Citigroup rescue bear noting.
First, the conclusion of the various Government actors that Citigroup had to be saved was strikingly ad hoc.
While there was consensus that Citigroup was too systemically significant to be allowed to fail, that
consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria. As
Secretary Paulson stated on one of the Citi Weekend conference calls, “If Citi isn’t systemic, I don’t know
what is.” FDIC Chairman Bair told SIGTARP that “we were told by the New York Fed that problems
would occur in the global markets if Citi were to fail. We didn’t have our own information to verify this
statement, so I didn’t want to dispute that with them.” Another FDIC official told SIGTARP that in terms
of Citigroup’s systemic significance, the FDIC directors and other Government entities “made a judgment
call.” Citigroup CEO Vikram Pandit summed up the feeling at the time when he told SIGTARP that no one
knew what the systemic effects of a Citigroup failure would be, and that no one wanted to find out.
Given the urgent nature of the crisis surrounding Citigroup, the ad hoc character of the systemic risk
determination is not surprising, and SIGTARP found no evidence that the determination was incorrect.
Nevertheless, the absence of objective criteria for reaching such a conclusion raised concerns. ThenDirector of the Office of Thrift Supervision John Reich, at FDIC’s Board meeting on November 23, 2008, in
which FDIC made its determination to proceed with the Citigroup transactions, observed that there had been
“some selective creativity exercised in the determination of what is systemic and what’s not,” and that there
“has been a high degree of pressure exerted in certain situations, and not in others, and I’m concerned about
parity.” Concerns about “selective creativity” and “parity” could be addressed at least in part by the
development, in advance of the next crisis, of clear, objective criteria and a detailed road map as to how
those criteria should be applied.

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43

Secretary Geithner told SIGTARP that he believed creating effective, purely objective criteria for evaluating
systemic risk is not possible: “What size and mix of business do you classify as systemic?…It depends too
much on the state of the world at the time. You won’t be able to make a judgment about what’s systemic
and what’s not until you know the nature of the shock” the economy is undergoing. Secretary Geithner also
suggested that whatever objective criteria were developed in advance, markets and institutions would adjust
and “migrate around them.” If the Secretary is correct, then systemic risk judgments in future crises will
again be subject to concerns about consistency and fairness, not to mention accuracy. The Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd-Frank Act”) created the Financial Stability Oversight
Council (“FSOC”) and charged it with responsibility for developing the specific criteria and analytical
framework for assessing systemic significance. That process is under way, with FSOC having invited
public comment on those issues. SIGTARP remains convinced that even if some aspects of systemic
significance are necessarily subjective and dependent on the nature of the crisis at the time, an emphasis on
the development of clear, objective criteria in advance of the next crisis would significantly aid decision
makers likely to be burdened by enormous responsibility, extreme time pressure, and uncertain information.
Moreover, FSOC must be transparent about how it will apply both objective and subjective criteria to a
failing institution, and must seek to gauge the market and adjust the criteria in the event that firms do indeed
seek to “migrate around them.” Without minimizing the legitimate concerns raised by Secretary Geithner, it
is imperative that FSOC not simply accept the adaptability of Wall Street firms to work around regulation,
but instead maintain the flexibility to respond in kind.
Second, the Government’s actions with respect to Citigroup undoubtedly contributed to the increased moral
hazard that has been a direct byproduct of TARP. While the year-plus of Government dependence left
Citigroup a stronger institution than it had been, it remained, and arguably still remains, an institution that is
too big, too interconnected, and too essential to the global financial system to be allowed to fail. Indeed, a
senior FRBNY official told SIGTARP in January 2010 (before the passage of the Dodd-Frank Act), that
Citigroup was then still “too big to fail,” and that if history repeated itself there is “no question we would do
it again...[with] a similar or different program.” Citigroup’s creditors and counterparties were left largely
unscathed by its need for repeated assistance from taxpayers, and the concern voiced by Chairman Bair on
February 22, 2009, for the need for management changes “at the top of the house” at Citigroup, arguably
was not fully addressed. While there have been notable changes at the board level and some changes in
management, some of those in Citigroup’s senior management who came to the Government seeking
assistance in 2008 remain in place.
When the Government assured the world in 2008 that it would use TARP to prevent the failure of any major
financial institution, and then demonstrated its resolve by standing behind Citigroup, it did more than
reassure troubled markets – it encouraged high-risk behavior by insulating the risk takers from the
consequences of failure. Unless and until institutions like Citigroup are either broken up so that they are no
longer a threat to the financial system, or a structure is put in place to assure that they will be left to suffer
the full consequences of their own folly, the prospect of more bailouts will potentially fuel more bad
behavior with potentially disastrous results. Notwithstanding the passage of the Dodd-Frank Act, which
does give FDIC new resolution authority for financial companies deemed systemically significant, the
market still gives the largest financial institutions an advantage over their smaller counterparts. They are
able to raise funds more cheaply, and enjoy enhanced credit ratings based on the assumption that the
Government remains as a backstop. Specifically, creditors who believe that the Government will not allow
such institutions to fail may under price their extensions of credit, giving those institutions access to capital
at a price that does not fully account for the risk created by their behavior. Cheaper credit is effectively a

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44

subsidy, which translates into greater profits, giving the largest financial institutions an unearned advantage
over their smaller competitors. And because of the prospect of another Government bailout, executives at
such institutions might be motivated to take greater risks than they otherwise would, shooting for a big
payoff but with reason to hope that if things went wrong they might still be able to keep their jobs.
The moral hazard effects of TARP in general and the bailouts of Citigroup in particular may eventually be
ameliorated by full implementation of the provisions of the Dodd-Frank Act, which was intended in part to
address the problem of institutions that are “too big to fail.” Whether it will do so successfully remains to
be seen, with important work by FDIC, FSOC, and a host of other regulators far from complete. Even after
those bodies develop and implement new rules and regulations authorized by the Dodd-Frank Act, which
would prohibit some of the benefits received by Citigroup under TARP, taxpayers likely won’t know about
the extent of their continuing exposure until the next crisis. As Secretary Geithner told SIGTARP in
December 2010, with the Dodd-Frank Act, the “probability of failure is reduced because the banks hold
more capital. The size of the shock that hit our financial system was larger than what caused the Great
Depression. In the future we may have to do exceptional things again if we face a shock that large. You
just don’t know what’s systemic and what’s not until you know the nature of the shock. It depends on the
state of the world – how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you
have to know the nature of the shock.”
Secretary Geithner’s candor about the difficulty of determining “what’s systemic and what’s not until you
know the nature of the shock,” and the prospect of having to “do exceptional things again” in such an
unknowable future crisis is commendable. At the same time, it underscores a TARP legacy, the moral
hazard associated with the continued existence of institutions that remain “too big to fail.” It also serves as
a reminder that the ultimate cost of bailing out Citigroup and the other “too big to fail” institutions will
remain unknown until the next financial crisis occurs.

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45

Management Comments and Audit Response
Treasury provided an official written response to this audit report in a letter dated January 12, 2011, which
is reproduced in full in Appendix L. Treasury’s response broadly concurred with the report. FDIC
provided an official written response to this audit report in a letter dated January 12, 2011. FDIC’s letter
offers four “clarifications” to the report. While SIGTARP has not incorporated FDIC’s suggested changes,
the letter is reproduced in full in Appendix L. FRB stated that it intends to provide an official written
response in the near future, a copy of which, if available, will be included in SIGTARP’s upcoming
Quarterly Report and will be added to the online version of this audit report. OCC stated that it would not
be providing a formal response.

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Appendix A − Scope and Methodology
We performed this audit under the authority of Public Law 110-343, as amended, which also incorporates
the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended.
We initiated this audit at the request of former Congressman Alan Grayson. The audit’s specific
objectives74 were to determine the basis on which the Government’s decision was made to provide
Citigroup with additional assistance, how the $301 billion asset pool was determined, and the basis for the
decision to allow Citigroup to terminate the AGP and repay its TIP capital infusion. We performed work at
Treasury’s Office of Financial Stability, FRB, FDIC, and OCC in Washington, D.C. We also performed
field interviews at Citigroup, FRBNY, and OCC in New York City. The scope of this audit covered
documents, records, and official testimony pertaining to Citigroup’s involvement in Treasury’s TIP and
AGP.
To determine the basis on which the Government’s decision to provide Citigroup with additional assistance
was made, we interviewed Treasury, FRB, FRBNY, FDIC, OCC, and Citigroup senior officials. Among
those interviewed were the former Secretary of the Treasury Henry Paulson, the former Interim Assistant
Secretary of the Treasury for Financial Stability Neel Kashkari, the Chairman of the Board of Governors of
the Federal Reserve System Ben Bernanke, FDIC Chairman Sheila Bair, Comptroller of the Currency John
Dugan, and Citigroup CEO Vikram Pandit. We also reviewed available Treasury, FRBNY, FDIC, OCC,
and Citigroup documentation – including analyses, reports, memos, meeting minutes, documents, emails,
press releases – pertaining to the creation of the AGP and TIP. In addition, we reviewed Sections 101 and
102 of EESA and the American Recovery and Reinvestment Act of 2009 to obtain an understanding of the
legal authority given to Treasury with regard to TIP and AGP.
To establish how the $301 billion asset pool was determined, we interviewed Treasury, FRBNY, and
Citigroup officials – which included former Secretary Paulson, FRBNY Chief Counsel Tom Baxter,
Citigroup Vice Chairman Kelly, and Citigroup Chief Risk Officer Brian Leach – and reviewed their email
exchanges to determine their roles in creating the asset pool. We also held interviews with key decision
makers from FRB, FDIC, and Treasury regarding asset pool policy decisions. We also interviewed PwC
and BlackRock officials. In addition, we obtained analyses and reports BlackRock prepared in conjunction
with the due diligence and valuation procedures they performed on the asset pool. We also utilized several
SEC filings and FRB reporting forms. We also obtained documentation including, but not limited to emails,
spreadsheets, and Word documents from Treasury, Citigroup, and FRBNY that were used to determine how
and why assets were selected.
74

The objectives for this audit were updated in January 2010 to reflect the repayment of TIP and the termination of AGP, as well
as to remove the risk management and internal controls objective (i.e., objective 3). Objective 3 was addressed in SIGTARP’s
report titled “Treasury’s Monitoring of Compliance with TARP Requirements by Companies Receiving Exceptional
Assistance” issued June 29, 2010. The original objectives were to determine the following: (1) the basis on which the decision
was made to provide asset guarantees to Citigroup, and the process for selecting the loans and securities to be guaranteed;
(2) what were the characteristics of the assets deemed to be eligible to be “ring-fenced”, i.e., covered under the program, how
do they compare with other such assets on Citigroup’s books, and what risk assessment measures were considered in their
acquisition; (3) are effective risk management and internal controls and related oversight processes and procedures in place to
mitigate risks to the Government under this guarantee program with Citigroup; and (4) what safeguards exist to protect the
taxpayer’s interests in the Government’s investment in the asset guarantees provided to Citigroup, and the extent of losses to
date.

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In addition, we reviewed the policies and procedures within the Citigroup AGP Master Agreement that
Treasury, FRB, FDIC, and Citigroup agreed to follow. To determine the basis for the decision to allow
Citigroup to terminate the AGP and repay its TIP capital infusion, we conducted interviews with Treasury
and Citigroup officials – including Citigroup CFO John Gerspach, Vice Chairman Kelly, and Chief Counsel
Michael Helfer – as well as FRBNY and OCC bank examiners. We also reviewed the results of the SCAP
stress test and the stress test that FRBNY performed on Citigroup in November 2009, as well as the related
documentation pertaining to the conditions under which Citigroup would be able to pay back TIP and
terminate AGP. These documents included, among other things, FRBNY memos, policies, analysis, and
correspondence with Citigroup.
This audit was performed in accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives. We conducted our review
from August 2009 to January 2011. We believe that the evidence obtained during this period of review
provides a reasonable basis for our findings and conclusions based on audit objectives.

Limitations on Data
Some of the individuals involved in the decision to provide Citigroup with additional assistance were no
longer at Treasury at the time of SIGTARP’s review. As a result, SIGTARP was unable to obtain key
details from Treasury behind the decision-making process to provide Citigroup with additional assistance.
In addition, we relied on the judgment of the staff of Treasury, FRB, FRBNY, FDIC, OCC, and Citigroup to
provide us with complete information for us to perform our review. Other data may exist that we did not
have the opportunity to review.

Use of Computer-processed Data
To perform this audit, we used ring-fence data aggregated by Citigroup’s Management Information
Systems. To assess the extent to which these systems generate reliable outputs, we interviewed officials of
PwC, the independent firm contracted by FRBNY to validate the ring-fence assets proposed by Citigroup.
We reviewed the validation report that Citigroup submitted to FRBNY and found nothing material that
would impede the use of Citigroup’s ring-fence data on the basis of reliability.

Internal Controls
As part of our audit, we examined the Government’s rationale and criteria into the decision to provide
Citigroup with additional assistance. We also examined the internal controls that the Government agencies
used to validate the estimates of ring-fence losses, as well as the controls over assets that were included in
the ring-fence. SIGTARP interviewed officials of BlackRock and PwC, the outside consultants that the
Government agencies brought in during the AGP creation and monitoring process.

Prior Coverage
Congressional Oversight Panel, “NOVEMBER OVERSIGHT REPORT: Guarantees and Contingent
Payments in TARP and Related Programs,” November 6, 2009.
Government Accountability Office, “FINANCIAL AUDIT: Office of Financial Stability (Troubled Asset
Relief Program) Fiscal Year 2009 Financial Statements,” December 9, 2009.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

Government Accountability Office, “TROUBLED ASSET RELIEF PROGRAM: Additional Actions
Needed to Better Ensure Integrity, Accountability, and Transparency,” December 2, 2008.

48

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EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

Appendix B − Citigroup TARP Capital Changes
December 31: Citigroup
issued Treasury $20 billion in
preferred stock
October 28: Citigroup
issued Treasury $25
billion in preferred stock
in CPP

Jan-08

Apr-08

Jul-08

Oct-08

November 23: The Government entered into an agreement
with Citigroup to provide a package of guarantees, liquidity
access and capital
Source: SIGTARP analysis.

January 16: Citigroup
issued $7.1 billion
preferred stock ($4 billion
to Treasury and $3 billion
to FDIC) in exchange for
guaranteeing a $301
billion pool of assets

Jan-09

Apr-09

June 9: Citigroup and the
Government finalized the
agreement to convert all $25
billion of CPP preferred stock
to common stock

Jul-09

January 2: Treasury released the program description for the
Targeted Investment Program under which the Citigroup capital
investment, announced Nov. 23 and injected on Dec. 31, was made

December 23: Citigroup
repaid $20 billion TIP and
in conjunction issued
$20.3 billion in common
equity throughout
December 2009

Oct-09

Jan-10

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Appendix C − Governance and Asset Management Guidelines

Source: Citigroup.

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Appendix D − Joint Statement by Treasury, Federal Reserve and
FDIC on Citigroup
November 23, 2008
Washington, DC – The U.S. government is committed to supporting financial market stability, which is a
prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on
Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and
capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection
against the possibility of unusually large losses on 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. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk
in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in
exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced
executive compensation restrictions and implement the FDIC’s mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial
system and protect U.S. taxpayers and the U.S. economy.
We will continue to use all of our resources to preserve the strength of our banking institutions and promote
the process of repair and recovery and to manage risks. The following principles guide our efforts:


We will work to support a healthy resumption of credit flows to households and businesses.



We will exercise prudent stewardship of taxpayer resources.



We will carefully circumscribe the involvement of government in the financial sector.



We will bolster the efforts of financial institutions to attract private capital.

Source: Office of Financial Stability.

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Appendix E – Glossary
Asset Filters ‒ The Government-defined set of criteria that qualified individual assets for the guaranteed
portfolio.
Asset Guarantee Program (“AGP”) ‒ Established under section 102 of EESA, allows the Department of
the Treasury to assume a loss position with specified attachment and detachment points on certain assets
held by the qualifying financial institution. The set of insured assets are selected by Treasury and its agents
in consultation with the financial institution receiving the guarantee.
Bank Failure ‒ A bank failure is the closing of a bank by a federal or state banking regulatory agency.
Typically, a bank is closed when it becomes critically undercapitalized or is unable to meet its obligations to
depositors and others.
Bank Holding Company ‒ A company that controls a bank. Typically, a company controls a bank through
the ownership of 25% or more of its voting securities. The Federal Reserve defines a bank holding
company as any company that directly or indirectly owns, controls, or has the power to vote 25% or more of
any class of the voting shares of a bank; controls in any manner the election of a majority of the directors or
trustees of a bank; or is found to exercise a controlling influence over the management or policies of a bank.
Collateral ‒ An asset pledged by a borrower to a lender until a loan is repaid.
Collateralized Debt Obligation ‒ A financial instrument that entitles the purchaser to some portion of the
cash flows from a portfolio of assets, which may include bonds, loans, mortgage-backed securities, or other
CDOs.
Commercial Paper ‒ Commercial paper is a short-term unsecured promissory note sold by corporations
and foreign governments to meet debt obligations such as payroll. For many large, creditworthy issuers,
commercial paper is a low-cost alternative to bank loans.
Common Stock ‒ Equity ownership entitling an individual to share in corporate earnings and voting rights.
Conservatorship ‒ In the case of Fannie Mae and Freddie Mac, conservatorship involved FHFA taking
control of the companies as authorized by the Housing and Economic Recovery Act of 2008. The powers of
the board of directors, officers, and shareholders are transferred to FHFA. In a receivership, shareholders
are permanently terminated, whereas in a conservatorship, shareholder rights are temporarily assumed by
the controlling entity.
Counterparty ‒ The other party that participates in a financial transaction. Every transaction must have a
counterparty. More specifically, every buyer of an asset must be matched with a seller that is willing to sell
and vice versa.
Coupon Rate ‒ Interest rate to be paid as a percentage of the face value of the security. For example, if a
$100 security has an 8% coupon, the owner of the security will receive $8 annually for the life of the
security.

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Credit Default Swap ‒ A contract where the seller receives a series of payments from the buyer in return
for agreeing to make a payment to the buyer when a particular credit event outlined in the contract occurs
(for example, if the credit rating on a particular bond or loan is downgraded or goes into default). It is
commonly referred to as an insurance-like product where the seller is providing the buyer protection against
the failure of a bond. The buyer, however, does not need to own the asset covered by the contract, which
means it can serve essentially as a “bet” against the underlying bond.
Credit Default Swap Spread ‒ A CDS is an insurance-like contract in which the seller receives a series of
payments from the buyer in return for agreeing to make a payment to the buyer if a particular credit event
outlined in the contract occurs – for example, if a bond or loan goes into default. A CDS spread is stated as
a percentage of par value that the insurance buyer is willing to pay the insurance seller in exchange for the
insurance for a specific time period. For the purposes of this report, CDS spreads are stated as annualized
quarterly payments. The higher the CDS spread, the more expensive it is to buy protection against default,
reflecting that the market sees that the institution standing behind the bond is more likely to default on its
obligations. In other words, the greater the spread, the less creditworthy the institution is regarded by the
market.
Deposit Run ‒ When large numbers of depositors suddenly demand to withdraw their deposits from a bank.
This may be caused by a decline in depositor confidence or fear that the bank will be closed by the
chartering agency. Banks keep only a small fraction of their deposits in cash reserves, and thus, large
numbers of withdrawals in short periods of time can cause even a healthy bank to have a severe liquidity
crisis that could cause the bank to be unable to meet its obligations and fail.
Dilution ‒ A reduction in earnings per share of common stock that occurs through the issuance of additional
shares or the conversion of convertible securities.
Discount Rate ‒ The discount rate is the interest rate charged to commercial banks and other depository
institutions on loans they receive from their regional Federal Reserve Bank’s lending facility – also called
the discount window. The Federal Reserve Banks offer three discount window programs to depository
institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All
discount window loans are fully secured.
Due Diligence ‒ The appropriate level of attention or care a reasonable person should take before entering
into an agreement or a transaction with another party. In finance, often refers to the process of conducting
an audit or review of documents/information prior to initiating a transaction.
FDIC Deposit Insurance ‒ FDIC protects depositors’ funds in the event of the financial failure of their
bank or savings institution. FDIC deposit insurance covers the balance of each depositor’s account, dollar
for dollar, up to the insurance limit, including principal and any accrued interest through the date of the
insured bank’s closing. The standard insurance amount currently is up to at least $250,000 per depositor,
per insured bank.
FDIC Deposit Insurance Fund ‒ FDIC’s deposit insurance fund consists of premiums already paid by
insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. No federal or
state tax revenues are involved.

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Federal Funds ‒ Funds deposited by commercial banks at the Federal Reserve banks, thereby enabling
banks temporarily falling short of reserve requirements to borrow funds from banks with excess reserves.
Liquidity ‒ The ability to easily convert an asset to cash, without any significant loss in value or transaction
cost.
Mandatorily Convertible Preferred Stock ‒ Preferred shares that can be converted to common stock at
the issuer’s discretion if specific criteria are met by a certain date.
Memorandum of Understanding ‒ A written but non-contractual agreement between two or more
agencies or other parties to take a certain course of action.
Moral Hazard ‒ A term used in economics and insurance to describe the lack of incentive individuals have
to guard against a risk when they are protected against that risk (for example, through an insurance policy).
In the context of TARP, it refers to the danger that private-sector executives/investors/lenders may behave
more recklessly, believing that the Government has insulated them from the risks of their actions.
Nationalization ‒ Nationalization is the acquisition and control of privately owned business by government.
Non-recourse Loan ‒ A secured loan whereby the borrower is relieved of the obligation to repay the loan
upon the surrender of the collateral.
Open Bank Assistance ‒ In an open bank assistance agreement, FDIC provides financial assistance to an
operating insured bank or thrift determined to be in danger of closing. FDIC can make loans to, purchase
the assets of, or place deposits in the troubled bank. Where possible, assisted institutions are expected to
repay the assistance loans.
Preferred Stock ‒ Equity ownership that usually pays a fixed dividend prior to distributions for common
stock owners but only after payments due to holders of debt and depositors. It typically confers no voting
rights. Preferred stock also has priority over common stock in the distribution of assets when a bankrupt
company is liquidated.
Regulation ‒ The supervision of financial markets and institutions.
Resolution ‒ The term “resolution” throughout this report means a disposition plan for a failed or failing
institution. It is designed to (1) protect insured depositors, and (2) minimize the costs to the relevant
insurance fund that are expected from covering insured deposits and disposing of the institution’s assets.
Resolution methods include purchase and assumption transactions, insured deposit transfer transactions, and
straight deposit payoffs. A resolution can also refer to an open bank assistance plan provided to an
institution to help prevent it from failing.
Ring Fencing ‒ Segregating assets from the rest of a financial institution, often so that the assets’ problems
can be addressed in isolation.
Secured Financing ‒ Debt backed or secured by collateral to reduce the risk associated with lending.

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Solvency ‒ A company’s ability to pay its debts with available cash.
Special Purpose Vehicle ‒ An off-balance-sheet legal entity that holds the transferred assets presumptively
beyond the reach of the entities providing the assets (i.e., legally isolated).
Sub Prime ‒ Refers to borrowers who do not qualify for prime interest rates because they exhibit one or
more of the following characteristics: weakened credit histories typically characterized by payment
delinquencies, previous charge-offs, judgments, or bankruptcies; low credit scores; high debt-burden ratios;
or high loan-to-value ratios.
Systemic Risk ‒ A risk that impacts the entire financial system and real economy, through cascading,
contagion, and chain-reaction effects.
Systemically Significant ‒ A financial institution whose failure would impose significant losses on
creditors and counterparties, call into question the financial strength of other similarly situated financial
institutions, disrupt financial markets, raise borrowing costs for households and businesses, and reduce
household wealth.
Tail Risk ‒ A form of portfolio risk that arises when the possibility that an investment will move more than
three standard deviations from the mean is greater than what is shown by a normal distribution. In terms of
the Citigroup ring-fence, tail risk referred to a low-probability loss scenario where losses would be severe or
complete.
Tangible Common Equity ‒ TCE, as defined by Citigroup, represents Common equity less Goodwill and
Intangible assets (other than Mortgage Servicing Rights (MSRs)) net of the related net deferred taxes. Other
companies may calculate TCE in a manner different from that of Citigroup.
Tier 1 Capital ‒ Consists primarily of common equity (including retained earnings), limited types and
amounts of preferred equity, certain minority interests, and limited types and amounts of trust preferred
securities. T1 does not include goodwill and certain other intangibles. Certain other assets are also
excluded from T1. It can be described as a measure of the bank’s ability to sustain future losses and still
meet depositors’ demands.
Total Risk-Weighted Assets ‒ A bank’s total assets after adjusting the value of each asset based on the risk
associated with that asset.
Trust Preferred Securities ‒ Securities that have both equity and debt characteristics, created by
establishing a trust and issuing debt to it.
Warrant ‒ The right, but not the obligation, to purchase a certain number of shares of common stock at a
fixed price.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

Appendix F − Definitions of Acronyms
Acronym

Definition

AGP
AIG
BHC
CDS
CMBS
CPP
EESA
FAS
FDIC
FHFA
FRB
FRBNY
FSOC
GTS
MIS
MOU
OCC
PwC
RMBS
SCAP
SIGTARP
SPV
TARP
TCE
TIP
TLGP

Asset Guarantee Program
American International Group
Bank Holding Company
Credit Default Swap
Commercial Mortgage-Backed Security
Capital Purchase Program
Emergency Economic Stabilization Act
Financial Accounting Standards
Federal Deposit Insurance Corporation
Federal Housing Finance Agency
Federal Reserve Board
Federal Reserve Bank of New York
Financial Stability Oversight Council
Global Transaction Services
Management Information Systems
Memorandum of Understanding
Office of the Comptroller of the Currency
PricewaterhouseCoopers
Residential Mortgage-Backed Security
Supervisory Capital Assessment Program
Special Inspector General for the Troubled Asset Relief Program
Special Purpose Vehicle
Troubled Asset Relief Program
Tangible Common Equity
Targeted Investment Program
Temporary Liquidity Guarantee Program

56

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Appendix G − Capital Raise Press Release
Citigroup Inc. (NYSE: C) December 16, 2009

Citi Prices $17 Billion Common Stock Offering and $3.5 Billion of Tangible Equity Units
Prices Largest U.S. Public Equity Offering in History
Citi to Repay $20 Billion of TARP Trust Preferred Securities, Terminate Loss-Sharing Agreement
U.S. Treasury Extends Lock-Up to 90 Days

NEW YORK – Citi today announced the pricing of 5.4 billion common shares and 35 million tangible
equity units as part of its agreement with the U.S. government and its regulators to repay U.S. taxpayers for
the $20 billion the government holds in TARP trust preferred securities and to terminate the loss-sharing
agreement with the government. The common stock priced at $3.15 per share, generating net proceeds of
approximately $17 billion. The tangible equity units priced at $100 each, generating net proceeds of
approximately $3.5 billion (about $2.8 billion counted as equity.) The combined offering of common stock
and tangible equity units is the largest public equity offering in U.S. capital markets history.
Upon completion of the offerings and the repayment of the $20 billion of the TARP trust preferred
securities and the termination of the loss-sharing agreement, Citi will no longer be deemed to be a recipient
of "exceptional financial assistance" under TARP.
The U.S. Treasury (UST) announced it would extend its lock-up period on the sale of its 7.7 billion share
common equity stake to 90 days from 45 days after the completion of this offering. The UST decided not to
sell any of its shares in connection with Citi's sale of common stock and tangible equity units.
The tangible equity units are comprised of a prepaid stock purchase contract and a junior subordinated
amortizing note. Each stock purchase contract has a settlement date of December 15, 2012 and will settle for
between 25.3968 and 31.7460 shares of Citi common stock, subject to adjustment as described in the final
prospectus relating to the offering. The amortizing notes will pay holders equal quarterly installments of
$1.875 per amortizing note, which in the aggregate will be equivalent to a 7.50% cash payment per year
with respect to each $100 stated amount of tangible equity units and has a scheduled final installment
payment date of December 15, 2012. Citigroup has the right to defer installment payments on the amortizing
notes at any time and from time to time but not beyond December 15, 2015.
After giving effect to the issuance of the $17 billion in common stock, $3.5 billion of tangible equity units
and $1.7 billion of stock compensation previously announced by Citi, as well as the repayment of $20
billion of the TARP trust preferred securities and the termination of the loss-sharing agreement, Citi's pro
forma Tier 1 capital ratio at the end of the third quarter of 2009 would have been 11.0%, compared with
12.8%. The company's pro forma Tier 1 common ratio at the end of the third quarter would have been 9.0%,
compared with 9.1%.
Citigroup Global Markets Inc. is serving as sole book-running manager of these offerings. Citi has granted
the underwriters for the common stock offerings an overallotment option to purchase up to 809.5 million
additional shares of common stock.

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Appendix H – Citigroup Entities
CITIGROUP’S SIGNIFICANT LEGAL ENTITIES OF SEPTEMBER 30, 2008
Entity

Entity Type

Total Assets (millions)

Citigroup Inc.
FHC
Citibank NA
Lead Bank
Citibank Overseas Investment Corp.
(COIC)
Edge Corp.

$2,050,131
$1,207,007

77,738
15,599
118,947

0.8%
5.8%

US Broker Dealer

333,445*

16.3%

UK Broker Dealer
Funding Subsidiary
(All guaranteed by Citigroup Inc.)
Parent of CCC Funding including
Canadian Commercial Paper (All
guaranteed by Citigroup Inc.)

190,774*
120,622*

9.3%
5.9%

75,343*

3.7%

59,887*
24,861*

2.9%
1.2%

87,205*

4.3%

Credit card issuing bank

Citicorp Tr Bk FSB
Citigroup Global Markets Holdings Inc.

FSB
Holding Company for
Broker/Dealer subs

Citigroup Global Markets Inc.
Citigroup Global Markets Limited
Citigroup Funding Inc.
Associates First Capital Corp.
(Associates)

Consumer Finance Company
CitiFinancial Credit Company (CCC) All funding guaranteed by
Citigroup Inc.
Citigroup Mexico Holdings LLC
Holding Company for Mexico
Banco Nacional De Mexico Sa

100%
58.9%
24.2% (Consolidated)
41.2% (Bank)
3.8%

Citibank (South Dakota) NA

496,768

% of Total Consolidated Assets

Mexican Bank subsidiary

* Total assets for these entities are as of 6/30/2008. Total assets for remaining entities are as of 9/30/2008.
Note: Numbers affected by rounding.
Source: Federal Reserve Board of Governors.

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Appendix I – Citigroup Initial Proposal (November 22, 2008)

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Appendix J – Government’s Term Sheet (November 23, 2008)

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64

Appendix K − Audit Team Members
This report was prepared and the review was conducted under the direction of Kurt Hyde, Deputy Inspector
General of Audits and Evaluations, and Clayton Boyce, Acting Assistant Deputy Inspector General of
Audits and Evaluations, Office of the Special Inspector General for the Troubled Asset Relief Program.
The staff members who conducted the audit and contributed to the report include: Eric Potocek, John
Gallagher, Natalie Lentz, and Scott Harmon.

EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.

Appendix L – Management Comments from Treasury, FDIC,
and FRB

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Note: SIGTARP received FRB’s response after publishing this report on January 13, 2011.

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SIGTARP Hotline
If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the Troubled
Asset Relief Program, please contact the SIGTARP Hotline.
By Online Form: www.SIGTARP.gov

By Phone: Call toll free: (877) SIG-2009

By Fax: (202) 622-4559
By Mail:

Hotline: Office of the Special Inspector General
for the Troubled Asset Relief Program
1801 L Street., NW, 4th Floor
Washington, D.C. 20220

Press Inquiries
If you have any inquiries, please contact our Press Office:
Kristine Belisle
Director of Communications
Kris.Belisle@do.treas.gov
202-927-8940

Legislative Affairs
For Congressional inquiries, please contact our Legislative Affairs Office:
Lori Hayman
Legislative Affairs
Lori.Hayman@do.treas.gov
202-927-8941

Obtaining Copies of Testimony and Reports
To obtain copies of testimony and reports, please log on to our website at www.sigtarp.gov.