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Government Offers Additional $20B to Shore Up Citi


From NPR News, this is All Things Considered. I'm Melissa Block. First this hour, the troubles of Citigroup and President-elect Barack Obama's plans for stimulus. In a few minutes we'll hear from one of Mr. Obama's top economic advisers. First, to Citigroup. For the first time in days shares of the company finished higher, but it took a massive intervention by the federal government. As NPR's Jim Zarroli reports, this latest bailout presents big risks for taxpayers.

JIM ZARROLI: The shock waves from the latest bailout hadn't yet subsided this morning when President Bush stepped forward to shoulder the responsibility for what had been done. Bailing out Citigroup, he said, was the right thing to do.

(Soundbite of speech)

President GEORGE W. BUSH (United States): We have made this kind of decisions in the past. We made one last night. And if need be, we're going to make these kind of decisions to safeguard our financial system in the future.

ZARROLI: Right or wrong, the bailout could end up being hugely expensive. The government is essentially buying $20 billion worth of Citigroup's stock, using money from the bailout fund approved by Congress this fall. That's in addition to the $25 billion the company has already received. The government will also agree to back most of a $300 billion portfolio of the company's toxic assets. Bart Narder, a banking analyst at the research firm Celent, says Citigroup has hundreds of billions of dollars in outstanding credit default swaps. Essentially, Narder says, the company has agreed to guarantee an enormous amount of corporate debt, and if it can't pay it the risks for the economy are considerable.

Mr. BART NARDER (Banking Analyst, Celent Research): If Citi were to go under, it is likely that they could drag a whole bunch of other banks, hedge funds, private equity funds along with them.

ZARROLI: In exchange for the $20 billion capital infusion, the government will get $27 billion worth of preferred shares of the company. The shares will pay a dividend of eight percent, economist Simon Johnson of MIT.

Mr. SIMON JOHNSON (Economist, MIT): We're also getting, lucky us, a warrant to buy up to $2.7 billion worth of common stock at a price of $10.61 per share. Now, Citi closed at $3.77 on Friday.

ZARROLI: Johnson says the shares don't begin to make up for the huge risks being taken with taxpayer money. In fact, he says, the terms of the deal are terrible for the government.

Mr. JOHNSON: This, I would say, is a much worse deal than what the auto companies proposed in Washington about 10 days ago. And got the - the management got thrown out of town for asking for too much.

ZARROLI: Johnson says what's worse, it's not even clear that the money the government is putting into the bailout will be enough. He says the deal isn't transparent enough and no one really knows exactly what Citigroup's exposure is to bad assets. But Citigroup officials insisted today that the bailout would help the company get back on its feet after a year in which it took punishing blows. Chief financial officer Gary Crittenden spoke on CNBC this morning.

Mr. GARY CRITTENDEN (Chief Financial Officer, Citigroup): This is a company that is well-capitalized and I think in a good position to go through the - what the environment that we're in.

ZARROLI: Crittenden brushed aside suggestions that the terms of the deal were overly favorable to the company.

Mr. CRITTENDEN: I don't think we won or lost in this process. I think what we've done is increase the confidence that the company has the strength to do what it needs to in this environment.

ZARROLI: If nothing else, the bailout of Citigroup sets a precedent. Until now regulators have used the federal bailout money to buy stock in big banks. Now, for the first time, the government is using taxpayer money to guarantee bad assets. The hope is that such a step will convince investors that Citigroup remains a safe bet, and that the company is ready to get its house in order. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.