The US government decision early last week to a USD306 billion rescue plan for Citigroup has reportedly brought great relief to customers of its home outfit, Citibank Tanzania Limited.
On Monday, U.S. Treasury agreed to shoulder some losses from toxic debt in the latest attempt to bolster financial services industry in turmoil.
The move comes after the banking giant saw its shares plunged by more than 60 per cent last two weeks ago.
In a press release from the Citibank Dar es Salaam branch stated that under the agreement, the U.S. Treasury would invest USD20 billion in Citigroup�s preferred stock under the Troubled Asset Relief Program (TARP).
The USD20 billion cash injection by the Treasury Department will come from the USD700 billion financial bailout package.
The capital infusion follows an earlier one � of USD25 billion � in Citigroup in which the government also received an ownership stake.
This measure will also boost the confidence of local depositors at the Citibank Tanzania Limited.
As part of the plan, Treasury and the FDIC will guarantee against the �possibility of unusually large losses� on up to USD306 billion of risky loans and securities backed by commercial and residential mortgages.
Under the loss-sharing arrangement, Citigroup Inc. will assume the first USD29 billion in losses on the risky pool of assets.
Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent.
Money from the USD700 billion bailout and funds from the FDIC would cover the government\'s portion of potential losses.
The Federal Reserve would finance the remaining assets with a loan to Citigroup.
In exchange for the guarantees, the government will get USD7 billion in preferred shares of Citigroup.
As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies.
The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.
Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners.
Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.
Under the IndyMac plan, struggling home borrowers pay interest rates of about three percent for five years. Rates are reduced so that borrowers aren\'t paying more than 38 percent of their pretax income on housing.
Soon after the announcement, European markets rose the most in six weeks to Monday.
Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail.
The company has operations stretching around the globe in more than 100 countries.
Analysts consider Citigroup the most vulnerable among the major U.S. banks-- especially hard hit by the meltdown in risky, sub-prime mortgages made to people with tarnished credit or low incomes.
Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments.
The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.
* SOURCE: Guardian
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