Following Friday's 60 percent plunge of Citigroup stock, the Federal government again works through the weekend to avert disaster. The stock market took Citigroup on a plunge to $4 per share, leaving Citigroup with a $160 billion lose in value from a year ago.

The dangerous stock sell-off was triggered by concerns of Citigroup's capitalization as it continues to sit on hundreds of billions of toxic mortgage assets. As a result, the US Treasury, Federal Reserve, and Citigroup negotiated through an unprecedented rescue package to bolster confidence ahead of Monday market open.

Early indications are that the strategy worked with Citigroup rallying 44 percent in futures trading.

The Citigroup bailout will consist of a $20 billion direct injection of capital and government guarantees on $306 billion in risky mortgage loans and securities assets. In exchange, the US government will get $20 billion in preferred shares with an 8 percent dividend.

The capital infusion comes on top of the already $25 billion that was taken by Citigroup from TARP. The additional, $20 billion will also be from the $700 billion bailout legislation.

The loan guarantees will be a combination of US Treasury and FDIC guarantee agreements. The US government will share any potential losses on the Citigroup portfolio. Citigroup will take the first 10 percent of any losses and the US government will absorb the remaining 90 percent. The US Treasury will pay up to $5 billion in losses with the FDIC stepping in should losses exceed that mark to take up to an additional $10 billion.

Many analyst on Friday reviewed the Citigroup crash not as a legitimate crisis of liquidity, like Bear Stearns or Lehman Brothers, but rather a crisis of confidence. This is likely why the US government was so quick to provide assistance. If a mega-bank like Citigroup were allowed to fail on confidence it would surely drag other larger, and sufficiently capitalized banks down.

Published on November 24, 2008