U.S. Rescues Citigroup; Three More Banks ClosedCiti Receives $20 Billion Bailout, Backing on $300b in Loans
Federal banking regulators made the dramatic move late on Sunday, issuing a statement seen by many as calculated to reinfuse confidence not just in Citi, but also in the country's financial services industry. This latest infusion is on top of the $25 billion that the government gave Citi in October, as part of the relief effort from the Troubled Asset Relief Program (TARP).
The Treasury, Federal Reserve and the FDIC said in a joint statement about the Citigroup bailout that the government is committed to supporting the financial market stability. "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."
Had the government not stepped in to aid Citigroup, whose stock value was plummeting to dangerous levels, the damage to the mighty financial institution would have caused chaos. The potential nightmare scenario included frozen lending markets, bringing more havoc to the nation's shaky economy that has been battered since the summer with a credit crunch and a flurry of takeovers, failures, fluctuations and layoffs.
The Citigroup bailout is only the latest of many this year by the government. The Federal Reserve gave backing to JPMorgan in March to buy Bear Stearns, or what was left of the brokerage firm. In the summer, the government stepped in and took over troubled mortgage lenders, Fannie Mae and Freddie Mac, making them government-sponsored enterprises. Another "too-Big-to-fail" enterprise, insurance giant AIG, was also bailed out with more than a $150 billion package, including a credit line, a buyback of underlying credit swaps and a $40 billion equity stake in the company.
Citigroup has much at stake -- and much to answer for, say federal regulators. As part of its rescue plan, the FDIC will guarantee against the possibility of unusually large losses on the more than $300 billion in risky loans and securities Citigroup holds. In turn, Citigroup must comply with new executive compensation restrictions, as well as modify mortgages to help homeowners avoid foreclosures, and offer terms similar to an FDIC plan that is working at IndyMac Bank, one of the first banks to crumble under the weight of risky mortgage loans last summer.
The IndyMac Plan lets homeowners pay interest rate of three percent for five years, reducing the rates that borrowers are only paying less than 38 percent of their pretax income on their mortgage. Another stipulation for Citigroup is that they won't be paying quarterly dividends to shareholders more than 1 cent a share for the next three years.
Citigroup was considered the most vulnerable of the big U.S. banks, especially after its takeover of Wachovia Corp. failed and Wells Fargo purchased it instead. The missed opportunity to add U.S. deposits was seen as a death knell for the bank that had failed to make a profit during the past year and last week announced it was slashing another 50,000 staff.
Three More Banks Fail
Three more banks failed on Friday. Two California-based banks and one bank in Georgia were closed by government banking regulators, bringing the total number of bank failures to 22 so far in 2008.
The two California-based institutions, Downey Savings and Loan Association of Newport Beach and PFF Bank & Trust of Pomona, were closed by the Office of Thrift Supervision, and the FDIC was appointed as receiver. U.S. Bank acquired all deposits of both thrifts. Downey had total assets of $12.8 billion and retail deposits of $9.7 billion. It had faced mounting losses that were depleting its capital. Downey's business concentrated on "nontraditional" mortgages, including payment-option and adjustable-rate mortgages. Downey was established in 1957 as a state-chartered savings and loan, then converted in 1995 to an OTS-chartered federal savings bank. It had 175 branches and nearly 2,200 employees
PFF Bank & Trust had $3.7 billion in assets and $2.4 billion in retail deposits and also faced accelerating losses since 2007, with a large concentration of housing construction loans hit hard by the deterioration of the West Coast real estate market. It had no reasonable prospect of becoming adequately capitalized. PFF, which was established in 1892 and came under the supervision of OTS's predecessor agency in 1933, had 38 branches and 700 employees.
U.S. Bank currently has 353 offices in California. Downey Savings and PFF Bank are not affiliated with each other. Downey Savings has 170 branches in California and five in Arizona, and PFF Bank has 38 branches in California.
The FDIC says the cost to the Deposit Insurance Fund will be $1.4 billion for Downey and $700 million for PFF Bank. U.S. Bank's acquisition of all the deposits of the two institutions was the "least costly" option for the FDIC. The two banks were the fourth and fifth banks to close in California in 2008.
The Community Bank of Loganville, GA was also closed on Friday by the Georgia Department of Banking and Finance. The FDIC was named received. The Bank of Essex, Tappahannock, VA acquired all the deposits of the Georgia bank. The bank's four branches opened today as Bank of Essex.
Community Bank had total assets of $681 million and deposits of $611.4 million. The FDIC says the cost to the Deposit Insurance Fund will be between $200 million and 240 million. Community Bank was the third bank to be closed in Georgia in 2008.