Fed rides to Citigroup’s rescue

Shares of Citigroup Inc. surged 66% this morning after the government gave the ailing financial services giant a capital infusion and a backstop for the company's debt.

Shares of Citigroup Inc. surged 66% this morning after the government gave the ailing financial services giant a capital infusion and a backstop for the company’s debt.
The company’s shares had plummeted nearly 60% last week.
“The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth,” the Department of the Treasury, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement.
Under the plan, the Department of the Treasury will inject $20 billion into the New York-based company from the government’s $700 billion Troubled Asset Relief Program, adding to the $25 billion that the company received last month.
Additionally, the government will provide the company with $306 billion in guarantees for troubled mortgages.
In turn, Citigroup will issue $7 billion in preferred shares with an 8% dividend rate to the Treasury and the FDIC.
The government’s preferred shares come with warrants to purchase 254 million Citigroup shares at $10.61 apiece, allowing taxpayers to profit if the stock rebounds following the government’s investment.
Additionally, Citigroup also agreed not to pay a quarterly common stock dividend exceeding one cent per share for three years, effective on the next quarterly common stock dividend payment.
“We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity,” Vikram S. Pandit, Citigroup’s chief executive, said in a statement, calling the government’s effort to address the lack of market confidence and the decline in the company’s stock prices “unprecedented.”
Last week, Citi shares fell $5.12 cents per share, or 57%, to close the week at $3.77.
One year ago, the company’s shares were trading at $31.70 and have since fallen 88%.
Citigroup were up $2.49, or 66%, to $6.25 in Monday morning trading.
“The capital injection buys Citigroup time and they need to make decisions to move the company in the right direction,” said Alois Pirker, analyst at Aite Group LLC of Boston.
“Investors have really voted with the [lower] share price and they are waiting for a much more clear strategy from the company.”