Citi joins the list of companies too big to fail

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 Treasury chief has been hammered by critics in Congress and elsewhere for his handling of the $700 billion bailout, especially for frequent and confusing shifts in strategy. Paulson abandoned an initial approach to buy rotten mortgages and other bad assets from banks and focused instead on buying ownership stakes in banks.

"Paulson is doing a poor job of explaining this to Mr. and Mrs. Kettle, but it is tough to explain all of this in a sort of sound bite," said Sean Snaith, economics professor at the University of Central Florida.

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 into 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," Snaith said. "It is like battling a virus that is mutating."

Citigroup was hit especially hard by the meltdown in risky subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked. That left Citi and other financial companies with huge losses on the soured investments.

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Under the loss-sharing arrangement, Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets, which stays on its books. Beyond that amount, the government would absorb 90 percent of the remaining losses and Citigroup 10 percent. Money from the $700 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 $7 billion in preferred shares of Citigroup.

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.

"If you're going to ask for a government bailout, you ought to tender your resignation," Hurley said.

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