U.S. may relieve Citi of billions in bad loans

By David Enrich and Carrick Mollenkamp
The Wall Street Journal
Sunday, November 23, 2008

http://online.wsj.com/article/SB122747680752551447.html

Citigroup Inc. is nearing agreement with U.S. government officials to create a structure that would house some of the financial giant's risky assets, according to people familiar with the situation.

While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank." That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.

The bad bank also might absorb assets from Citigroup's off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company's balance sheet. Citigroup also has about $2 trillion in loans, securities and other assets on its balance sheet as of Sept. 30.

Behind the push is a broad effort to shore up faith in the New York company, which saw its stock price tumble by 60% last week to a 16-year low.

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.

A Citigroup spokeswoman declined to comment on the discussions.

It is unclear whether the U.S. government will take an equity stake in Citigroup in return for providing a financial backstop. Also uncertain is if Citigroup would get a government loan to finance the facility. The government took that approach with insurer American International Group Inc. in late September.

It wasn't known Sunday afternoon if Citigroup will have to make changes to its executive ranks, board or elsewhere inside the company in return for getting government assistance.

After weekend discussions between Citigroup executives and officials at the Federal Reserve and Treasury Department, the parties are hoping to unveil an agreement Sunday evening, the people said.

As Citigroup shares fell last week, Chief Executive Vikram Pandit and other top executives insisted that the plunge wasn't a threat because the company has plenty of capital and liquidity. But by Friday, bank officials were hoping for a public expression of confidence by the government, believing that would help reassure clients and customers.

One rescue structure under consideration would resemble part of the $150 billion bailout plan that the government struck with AIG in November as part of a restructuring of the previous bailout. Two vehicles, funded largely by as much as $52.5 billion in government money, were created to take on risks from some of AIG's souring assets, including exposure to credit derivatives.

That deal also reduced interest costs on AIG's $60 billion loan from the government.

* * *

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.