US' struggle to save financials continues with Citi

The US Treasury (UST) appears to have been haunted by Lehman Brothers woes. UST cannot see Citigroup falling down. It is such a big player in the financial system that its failure can jolt the already feeble banking system. According to an article on BBC news:

"If the bank were to collapse, it could have caused financial havoc around the globe, seizing up fragile lending markets and causing untold losses among institutions holding debt and financial products backed by the company. "

So here comes the biggy-big rescue package for the giant. Some crucial points in the package are:

• A pool of $306 billion assets identified and Citigroup will bear first $29 billion losses on it rest to be absorbed by UST , Federal Reserve (Fed) and Federal Deposit Insurance Corp. (FDIC).
• Treasury department will give $20 billion from the $700 billion package passed for rescuing the entire financial industry. This is under the Troubled Asset Relief Program (TARP).
  
• Govt will get $7 billion of preferred shares with 8% dividends.
  
• Dividends will be limited to $0.01 per share for next 3 years.
  
• 10 year warrants of $2.7 billion to FDIC and Treasury department at strike price of $10.61 per share.
• Citibank to help distressed homeowners.

The Citi's term sheet of agreement is available from Citigroup's website.

The impact of this package will be that Citigroup's capital adequacy will improve with additional $40 billion in capital benefits. This capital infusion will make the Citigroup's Tier-1 capital ratio at 14% well above the mandatory requirement. On the other hand this rescue has increased the burden on the US government and more than trillion dollars of tax-payers money is at stake. With more and more companies lined up for protection the $700 billion may fall well short. Automobile giants like GM and Ford are so close to bankcrupcy and they certainly require some capital infusion to keep them alive.

Despite the lucrative package, investors at Wall Street are still skeptical about the long term outcome of this. But one thing is sure that if this works out well in near future more of such packages will be seen making their way.