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.

A survival question for Citibank

Citigroup is too big to fail, you must be kidding... Not anymore.

Amidst the fray of failing banks Citibank may be the biggest addition. From being the world's biggest bank about a year and a half ago, today Citibank has serious threats of solvency. This is reflected in its stock price which has plummeted from about $30 per share to about $4 per share. Citibank was under the speculators radar since Vikram Pandit had replaced Chuck as the leader. But with the bank losing Wachovia Corp. deal to Wells Fargo & Co., the negatives started outweighing. And with the continuing losses of billions of dollar every quarter, the stock price saw a sharp decline of about 60% in last week amid speculations of a possible takeover or merger.

Citibank is one of the biggest banks of the world and employs more than 350,000 people. It reduced its workforce by 11,000 in the latest quarter ending September 2008. It has a customer base of more than 200 million and operations in close to 140 countries. Citibank's total assets declined by $50 billion in this quarter, thats 13% decline to 2,050 billion dollars. The question is that with accumulated losses every quarter and a large amount of risky assets still in the bank's portfolio, isn't the future shaky for Citi?

Speculation is that US government is working on a plan to rescue the bank. It will be a tough task ahead for the government to bail out the giant (though not so giant anymore).

Can Vikram Pandit, new CEO, rescue Citi?

Citi is having a bad time and so are its management. After the exit of Chuck Prince from the company, Citigroup was in search for a new visionary who could lead the company out of ongoing crisis. No doubt it must have been a tough task to select the CEO of such a large organization. Finally Vikram Pandit has been given the responsibility of chief executive of Citigroup.

Vikram Pandit, an Indian, is 50 year old and is a well respected investment banker. But this is the first time he will be leading a big corporation like citi. Critics doubt whether he could prevent citi from disaster. Pandit is looked as a cautious and conservative banker. Earlier he was Chairman and CEO of Citi's Institutional Clients Group.
Citi website has biography of Mr. Pandit. Some of key points are:"He was a founding member and chairman of the members committee of Old Lane, LP, a multi-strategy hedge fund and private equity fund manager that was acquired by Citi in 2007.
Prior to forming Old Lane, Mr. Pandit was President and Chief Operating Officer of Morgan Stanley's institutional securities and investment banking business and was a member of the firm's Management Committee....

Mr. Pandit earned a PhD in Finance from Columbia University in 1986.... "

After being appointed CEO, Mr. Pandit said:

"During this challenging time, Citi's role in the global markets is more vital than ever. We will address our issues head-on while continuing to deliver value for our clients, shareholders, employees and the communities in which we operate."

Citi's stock prices have fallen by more than 35% during last three months. This is first time in five years that its stock prices went below 30 dollar mark. Earlier citi group had declared huge write-downs of 17 billion dollars and decline in operating profits. Currently citi faces a debt threat and it has done a stake sale worth 7.5 billion dollars to Abu Dhabi Investment Authority last month. Citi is also planning to lay-off 17000 employees to cut costs.

During an interview with Business Week Magazine, Mr Pandit said:

“There are three things I’m focusing on. One, we have to make sure we have the right productivity levels. And that runs the gamut of putting capital to work correctly in the right places.

Job two is to look at every one of our businesses . . . individually and collectively, to make sure they are the right businesses and they are positioned for the future we see in financial services....”