Feds say U.S. needs Citigroup rescue

WASHINGTON – Taxpayers may be wondering why they’re forking over more money to rescue yet another behemoth, Citigroup, even as their own nest eggs crack and jobs evaporate.

The answer is that Uncle Sam thinks letting Citi fail is unthinkable.

The government has decided that guaranteeing hundreds of billions of dollars in possible losses and injecting $20 billion more into Citi trumps the alternative: a panic that could leave retirement accounts and investment portfolios of millions of ordinary Americans in tatters and shove more people out of jobs.

Whether the government’s rescue of Citigroup Inc., announced late Sunday, will ultimately prove a good deal for taxpayers is hard to tell. In part, that’s because no one seems sure what Citi’s troubled assets are actually worth.

If the gamble pays off, Citigroup would be back on firm footing, unhinged financial markets would recover and taxpayers would turn a profit. If it doesn’t, taxpayers would take a hit. And they would possibly have to rescue still more huge financial institutions, digging the bailout hole even deeper.

Back in 1979, the U.S. guaranteed $1.2 billion worth of loans to Chrysler. When the struggling automaker rebounded four years later, the government reaped more than $300 million in profits.

The Bush administration, which leaves office Jan. 20, has decided that Citigroup, insurer American International Group and mortgage giants Fannie Mae and Freddie Mac are indeed too big to let fail.

Yet Treasury Secretary Henry Paulson has opposed using money from the $700 billion financial bailout to help teetering Detroit automakers or financially troubled homeowners. The bailout money, Paulson has said, was intended to stabilize the fragile financial system, including major banks.

Many in Detroit resent the fact that Citi and AIG received government bailout money while auto executives have been grilled, rebuffed and required to come up with plans to justify fresh federal loans.

The case for rescuing Citigroup, a company with 200 million customers and operations in more than 100 countries, may be more persuasive than the case for smaller banks whose reach doesn’t extend so far. Still, the government action makes other financial companies more likely to seek federal aid.

President Bush held open the prospect Monday of similar arrangements should other companies falter. And Paulson could still decide to tap the second $350 billion installment of the $700 billion package.

Treasury and the Federal Reserve are exploring using some of the bailout money to bankroll a new loan facility to help companies that issue credit cards, make student loans and finance car purchases.

The $20 billion cash injection by the Treasury Department will come from the $700 billion package. The capital infusion follows an earlier $25 billion infusion in which the government also received an ownership stake. That earlier $25 billion was part of a capital injection program for major banks.

As part of the plan, Treasury and the Federal Deposit Insurance Corp. will guarantee against the “possibility of unusually large losses” by Citi on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

“An eclectic response is necessary given how the crisis is evolving,” said Sean Snaith, economics professor at the University of Central Florida. “It is like battling a virus that is mutating.”

As a condition of the rescue, Citigroup cannot pay quarterly dividends to shareholders of more than 1 cent a share for three years unless it obtains consent from the three federal agencies. The bank is now paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter.

The agreement also restricts executive pay, including bonuses. But it doesn’t get rid of Citi’s top management as the government did with AIG.