eFinancialCareers

What is it?

Citigroup is one of the biggest banks in the world. Until 2008, it was the biggest bank in the world. But since the onset of the credit crunch, it’s run into a few problems.

What’s it got to do with the financial crisis?

Citigroup’s woes came to something of a head in late November 2009. Its shares, already down to its lowest level for more than 10 years plummeted 23% in a single day after its chief exec announced 52,000 redundancies. For a moment, it looked as if Citigroup was going the way of Bear Stearns and Lehman Brothers.

The US government therefore negotiated a very special bailout package with Citigroup. As one of the biggest banks of all, Citigroup falls firmly into the category of ‘too big to fail’, meaning that if it were left to go bankrupt in the same way as Lehman, meltdown would probably follow.

The key points of the Citigroup bailout were:

1) An insurance programme: The US government offered to ‘insure’ Citigroup against big losses on its particularly toxic assets.

Under this insurance programme, Citigroup got to select $306bn of its most toxic assets (most of which were mortgage backed securities).

The US government stipulated that Citigroup had to cover any losses on these assets up to $29bn. Above $29bn, the bank will have to cover 10% of any additional losses and the US government will cover the remaining 90%. This guarantee will last for a whole 10 years.

2) Buying Citigroup stock and therefore increasing the bank’s capital base. Under the bailout, the US government bought an additional $20bn of TARP programme to $45bn. This stock pays a generous rate of interest, of 5% on the first $25bn and 8% on the next $20bn.

The big question is whether this rescue is enough. Detractors say leverage, that things like credit cards and overseas loans portfolios which aren’t included in the insurance scheme are Return to A-Z home page.