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Report Pursuant to Section 129 of the
Emergency Economic Stabilization Act of 2008:
Authorization to Provide Residual Financing to Citigroup, Inc.
For a Designated Asset Pool
Overview
On November 23, 2008, the Board of Governors of the Federal Reserve
System (the “Federal Reserve”), based on the unanimous vote of its five members,
authorized the Federal Reserve Bank of New York (the “Reserve Bank”) under
section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) to provide Citigroup,
Inc. (“Citigroup”), if necessary, residual financing for the value of assets remaining
in a designated pool after certain loss sharing arrangements with Citigroup, the
Department of the Treasury (the “Treasury”) and the Federal Deposit Insurance
Corporation (the “FDIC”) are exhausted. As discussed further below, this
authorization was granted as part of a package of coordinated actions by the
Treasury, FDIC, and Federal Reserve to provide financial support to Citigroup and
promote financial stability.
Background
Citigroup is one of the largest financial institutions in the United States and
has extensive and diversified operations both in the United States and abroad. As
of September 30, 2008, Citigroup was the second largest banking organization in
the United States, with total consolidated assets of slightly more than $2 trillion.
As of the same date, Citigroup’s lead subsidiary bank, Citibank, N.A., had total
consolidated assets of approximately $1.2 trillion, making the bank the third largest
U.S. insured depository institution in terms of assets.
Citigroup is a major supplier of credit in the United States and abroad, with
more than $750 billion in loans outstanding at the end of the third quarter of 2008.
As of the same date, Citigroup held more than $277 billion in domestic deposits
and more than $500 billion in foreign deposits, making the organization one of the
largest deposit holders in the world. Citigroup also has significant amounts of
commercial paper and long-term senior and subordinated debt outstanding; is a
major participant in numerous domestic and international payment, clearing and
central counterparty arrangements; and is a significant counterparty to many major
national and international financial institutions. In addition, Citigroup provides a
wide range of investment banking, capital markets, asset management, and retail
brokerage services through its subsidiary Citigroup Global Capital Markets, Inc.,
and is a major participant in a wide range of derivatives markets.
Over the past year and a quarter, Citigroup and its insured depository
institutions have been negatively affected by the ongoing disruptions in the
financial markets, the broad-based decline in home prices, the accompanying
substantial drop in the values of mortgages and mortgage-backed securities and a
deterioration in the economic outlook both in the United States and abroad. In the
first three quarters of this year, Citigroup posted losses of $10.4 billion due, in part,
to losses on mortgage-related securities and exposures and high provisions for
future credit losses. On October 28, 2008, the Treasury acquired $25 billion of
preferred stock of Citigroup, as well as related warrants, as part of the first tranche
of capital purchases made under the Capital Purchase Program (“CPP”) established
under the Troubled Assets Relief Program (“TARP”). The CPP is available to a
broad range of financial institutions.
In recent weeks, however, investors became increasingly concerned about
Citigroup’s financial prospects and viability, threatening the ability of the
organization to continue to obtain funding. Despite actions by the Federal
Reserve, Treasury and FDIC in recent months to ease the pressures on financial
markets, these markets continue to be strained, and firms viewed as being
potentially troubled can find it very difficult to raise funds.
Overview of the Board’s Authorization and Related Programs
In light of these and other factors, including conditions in the financial
markets and the state of the U.S. economy, the Treasury, FDIC, and Federal
Reserve agreed on November 23, 2008, to provide Citigroup with a package of
programs and facilities to help restore confidence in Citigroup and promote
financial stability, which is a prerequisite to restoring vigorous economic growth.
Collectively these new measures will augment the capital of Citigroup; protect the
company from further declines in the value of a substantial pool of primarily
mortgage-related assets; and better enable the company, its subsidiary depository
institutions and the financial system to weather the current difficulties, and provide
credit and other financial services needed by consumers, small businesses, and
others.
The following describes the three components of the assistance provided to
Citigroup. Additional information concerning these actions is included in the
attached term sheets.
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1. Additional Equity Investment by the Treasury.
The Treasury will acquire an additional $20 billion in newly-issued senior
preferred stock of Citigroup under the systemically significant financial institution
program established under the TARP. The preferred stock will carry an 8 percent
dividend to the Treasury, and includes terms designed to protect the interests of
taxpayers. As required by the Emergency Economic Stabilization Act, the
Treasury will receive warrants to purchase common stock of Citigroup at a strike
price of $10.61 per share and with an aggregate value of $2.7 billion. Under the
terms of the preferred stock, Citigroup also will be required to (i) abide by
enhanced executive compensation standards that are deemed to be acceptable to
the Treasury, Federal Reserve, and FDIC, and (ii) implement a program designed
to reduce preventable foreclosures on owner-occupied residential properties.
2. Treasury and FDIC Loss-Sharing Arrangements with Citigroup.
Treasury and the FDIC also have agreed to share with Citigroup losses on a
designated pool of up to $306 billion in primarily mortgage-related assets currently
held by Citigroup. This designated pool of assets, which will remain on
Citigroup’s consolidated balance sheet, will be comprised of loans and securities
backed by residential and commercial real estate, associated hedges, and such
additional assets as may be agreed by Citigroup and the agencies. Under the terms
of the guarantee arrangement, Citigroup first will bear responsibility for any losses
on these assets that exceed the company’s current reserves and marks, up to a
maximum of $29 billion. Should there be additional losses on these assets, the
losses will be shared among Citigroup, Treasury, and the FDIC. Citigroup will
bear responsibility for 10 percent of the additional losses; the remaining portion
would be allocated first to the Treasury, up to a maximum of $5 billion, and then to
the FDIC, up to a maximum of $10 billion. These loss-sharing arrangements will
be in effect for 10 years for residential mortgage-related assets and 5 years for
other assets. As compensation for these guarantees, the Treasury and FDIC will
receive $4 billion and $3 billion, respectively, of preferred stock in Citigroup,
which will bear dividends at 8 percent per annum.
3. Residual Federal Reserve Financing.
In connection with these actions, the Federal Reserve authorized the Reserve
Bank under section 13(3) of the Federal Reserve Act, if necessary, to provide
Citigroup with financing up to the value of the assets remaining in the designated
pool after the loss sharing arrangements with the Treasury and FDIC are
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exhausted. Any financing provided by the Reserve Bank would be collateralized
by the assets in the designated pool, and also would be protected by a continuing
10-percent loss-sharing position of Citigroup. The financing would be provided to
Citigroup on a non-recourse basis, except with respect to interest payments.
Outstanding advances made to Citigroup under the facility would bear interest at a
floating rate equal to the 3-month overnight index swap rate plus 300 basis points.
Any residual financing provided by the Federal Reserve would complete the
remainder of the term of the guarantee arrangements, i.e., the financing would
terminate 10 years after the start date of the guarantee for residential mortgagerelated assets and 5 years for other assets.
In light of the substantial protections against loss provided by Citigroup, the
Treasury, and the FDIC that must be exhausted before any financing would be
provided under the facility, and the fact that any financing provided under the
facility would be fully collateralized, the Federal Reserve does not expect that the
Reserve Bank’s facility will result in any losses to the Federal Reserve or the
taxpayer.
Attachment
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November 23,2008
Summary of Terms
Eligible Asset Guarantee
Eligible Assets:
Asset pool consisting of loans and securities backed by residential real
estate and commercial real estate, and their associated hedges, as agreed,
and other such assets as the U.S. Government (USG) has agreed to
guarantee. Each specific asset must be identified on signing of guarantee
agreement. Assets will remain on the books of institution but will be
appropriately "ring-fenced."
Size:
Up to $306 bn in assets to be guaranteed (based on valuation agreed upon
between institution and USG).
Term of Guarantee: FDIC standard loss-sharing protocol: Guarantee is in place for 10 years
for residential assets, 5 years for non-residential assets.
Deductible;
Institution absorbs all losses in portfolio up to $29 bn (in addition to
existing reserves)
Any losses in portfolio in excess of that amount are shared USG (90%)
and institution (10%).
USG share will be allocated as follows:
UST (via TARP) second loss up to $5 bn;
FDIC takes the third loss up to $10 bn;
Financing:
Federal Reserve funds remaining pool of assets with a non-recourse loan,
subject to the institution's 10% loss sharing, at a floating rate ofOIS plus
300bp. Interest payments are with recourse to the institution.
Fee for Guarantee
Preferred Stock:
Institution will issue $7 bn of preferred stock with an 8% dividend rate
(under terms described below). $4 bn ofpreferred will be issued to UST.
$3 bn will be issued to the FDIC.
Management of
Assets:
Risk Weighting:
USG will provide institution with a template to manage·guaranteed assets
This template will include the use of mortgage modification procedures
adopted by the FDIC, unless otherwise agreed.
Institution will retain the income stream from the guaranteed assets. Risk
weighting for assets will be 20%.
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November 23,2008
Dividends:
Executive
Compensation:
Institution is prohibited from paying common stock dividends, in excess
of$.01 per share per quarter, for 3 years without USTIFDICIFRB consent.
A factor taken into account for consideration of the USG's consent is the
ability to complete a common stock offering of appropriate size.
An executive compensation plan, including bonuses, that rewards long
term performance and profitability, with appropriate limitations, must be
submitted to, and approved by, the USG
Corporate
Governance:
Other matters as specified
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/
November 23, 2008
Preferred Securities
Issuer:
Citigroup ("Citi")
Initial Holder:
United States Department of the Treasury ("UST").
Size:
$20 billion
Security:
Preferred, liquidation preference $1,000 per share. (Depending upon the
available authorized preferred shares, the UST may agree to purchase
preferred with a higher liquidation preference per share, in which case the
UST may require Citi to appoint a depositary to hold the Preferred and
issue depositary receipts.)
Ranking:
Same terms as preferred issued in CPP.
Term:
Perpetual life.
Dividend:
The Preferred will pay cumulative dividends at a rate of8% per annum.
Dividends will be payable quarterly in arrears on February 15, May 15,
August 15 and November 15 of each year.
Redemption:
In stock or cash, as mutually agreed between UST and Citi. Otherwise,
redemption terms of CPP preferred terms apply.
Restrictions
on Dividends:
Institution is prohibited from paying common stock dividends, in excess
of$.Ol per share per quarter, for 3 years without UST consent. A factor
taken into account for consideration ofthe UST's consent is the ability to
complete a common stock offering of appropriate size.
Repurchases:
Same terms as preferred issued in CPP.
Voting rights:
The Preferred shall be non-voting, other than class voting rights on (i) any
authorization or issuance of shares ranking senior to the Preferred, (ii) any
amendment to the rights of Preferred, or (iii) any merger, exchange or
similar transaction which would adversely affect the rights ofthe
Preferred.
If dividends on the Preferred are not paid in full for six dividend periods,
whether or not consecutive, the Preferred will have the right to elect 2
directors. The right to elect directors will end when full dividends have
been paid for (i) all prior dividend periods in the case of cumulative
Preferred or (ii) four consecutive dividend periods in the case of non
cumulative Preferred.
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November 23, 2008
Transferability:
Executive
Compensation:
The Preferred will not be subject to arty contractual restrictions on
transfer.
An executive compensation plan, including bonuses, that rewards long
term performance and profitability, with appropriate limitations, must be
submitted to, and approved by, the USG.
Summary of Warrant Terms
Warrant:
Institution will issue a warrant to UST for an aggregate exercise value of
10% ofthe total preferred issued to USG (in both transactions) ($2.7 bn).
Exercise Price:
The strike price will be equal to $10.61 per share (the 20 day trailing
average ending on November 21,2008). The warrants issued to UST are
not subject to reduction based on additional offerings.
Term:
Ten years, immediately exercisable, in whole or in part.
DEPARTMENT OF THE TREASURY
FEDERAL RESERVE BOARD
CITIGROUP INC.
FEDERAL DEPOSIT INSURANCE CORP.
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@FedFRASER