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The Future of Citigroup

What does the future hold for Citigroup now that the U.S. Government has thrown the company a rescue rope?

Citigroup received word on Monday, November 4, 2008 that it would be rescued by the government to the tune. The U.S. Treasury, through the use of TARP funds, will buy $20 million in Citigroup preferred stock. Citi had already received $25 billion in bailout money.

The Treasury, Federal Reserve and FDIC will provide guarantees to Citi for up to $306 billion in exchange for $7 billion in preferred stocks and warrants for 254 million shares of common stock priced at $10.61.

Citi will absorb the first $29 billion in losses on troubled assets and $10 billion on any remaining losses, while the government will cover the remaining 90 percent in losses.

The agreement calls for Citi to get an executive compensation plan approved by the federal government and cannot pay more than a one-cent quarterly without governmental approval.

The stock market rallied nearly 400 points on the news of the Citi rescue, marking the winningest back-to-back days since October 1987. Citi stock rose $2.18 on Monday to $5.95. Citi stock had dropped 87 percent in 2008 to $3.77 on Friday, November 21, 2008.

Citigroup, like others of its kind, has faltered because of subprime loans. But Citi made poor loan decisions through its credit card division, as well as to those buying a home. It is estimated that Citi has $300 billion in so-called "toxic" assets. There are $667 billion in mortgage-related off-balance-sheet assets.

The company could still be sold, a notion that at one time was unfathomable. Because of current conditions there are few suitors for such a purchase. One popular notion is for Goldman Sachs to buy Citi, which has $780 billion in bank deposits and more than 200 million customers. A purchase would immediately give Goldman Sachs loads of new branches. U.S. Bancorp has also been mentioned as a possible candidate to buy Citigroup. Such a purchase would give the Midwest bank a strong presence on the East Coast.

There could be a shakeup in the Citi hierarchy, although the fate of CEO Vikram Pandit was not a part of the bailout agreement. Pandit, who a week earlier insisted the company was on firm footing, will probably stay on with Citi.

Now the question remains: Who's next? Bank of America and Morgan Stanley are contenders. Bank of America absorbed billions of mortgages when it bought CountryWide. Morgan Stanley is expected to lose nearly a dollar a share this quarter. Stay tuned.

- by BetterTrades Financial Analysts

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