Since the last short post on whether Citi will fall, the government and Citigroup (C) announced today that a $20 billion cash injection has been made by the Treasury Department. To date, the $700 billion financial bailout has already given Citigroup $45 billion dollars to receive an ownership stake.
Even more importantly though, the Treasury and FDIC announced that they will guarantee a majority of Citi’s whole mortgage security portfolio of $306 billion if they were to default. More specifically, Citigroup will take the first $29 billion of losses on the risky loans, then 90% further losses will be assumed by the government (the rest, 10%, is still assumed by Citigroup).
The potential losses will made up from the $700 bailout fund, money from the FDIC, then the federal reserve will finance the remaining assets and loan it to Citigroup.
On top of this, the government will get $7 billion in preferred shares of C, along with 254 million shares of common stock at a strike price of $10.61. The bank will cut the quarterly dividend to 1 cent a share and won’t be increasing the dividend for 3 years unless the FDIC, Treasury department and the Federal Reserves all approves it. Why not kill the dividend all together you say? Because some mutual funds are not allowed to own companies who don’t pay dividends. Citigroup will also place restrictions on executive compensation and bonuses for the future.
As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.
The stock market certainly liked this, The Dow rallied 396.97 points today after the news, with Citi’s shares up 57.82% just in one day! If you bought Citigroup on Friday, congratulations! If you are a long term share holder however, it’s unclear how this will play out because in practice, this cash injection actually diluted your shares, not to mention the fact that the dividend is gone.
Oh well! On to another day’s of exciting news!
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