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C » Topics » U.S. Government Loss-Sharing Agreement

These excerpts taken from the C 10-K filed Feb 27, 2009.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement providing for loss sharing by the UST, FDIC and the Federal Reserve Bank of New York on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). In consideration for this loss-sharing agreement, Citigroup issued $7.3 billion of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST and the FDIC. Of the issuance, $3.5 billion will be treated as Tier 1 Capital for regulatory purposes.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement providing for loss sharing by the UST, FDIC and the Federal Reserve Bank of New York on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). In consideration for this loss-sharing agreement, Citigroup issued $7.3 billion of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST and the FDIC. Of the issuance, $3.5 billion will be treated as Tier 1 Capital for regulatory purposes.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement with the UST, FDIC and the Federal Reserve Bank of New York (collectively, the USG) on losses arising on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). As consideration for the loss-sharing agreement, Citigroup issued non-voting perpetual, cumulative preferred stock and a warrant to the UST and FDIC.

The preferred stock issued to the UST and FDIC has an aggregate liquidation preference of $7.3 billion and an annual dividend rate of 8%. The warrant has a term of 10 years, an exercise price of $10.61 per share and is exercisable for approximately 66.5 million common shares. Citigroup received no additional cash proceeds for their issuance. Of the issuance, $3.5 billion of the consideration for the preferred stock, representing the fair value of the issued shares and warrant, will be treated as Tier 1 Capital for regulatory purposes, and it is expected to add approximately 30 basis points to the Tier 1 Capital ratio, on a pro forma basis, during the first quarter of 2009. The value of the premium ($3.5 billion) will be amortized and recognized as an expense over the life of the loss-sharing agreement.

The loss-sharing program extends for 10 years for residential assets and five years for non-residential assets. Under the agreement, a “loss” on a portfolio asset is defined to include a charge-off or a realized loss upon collection, through a permitted disposition or exchange, or upon a foreclosure or short-sale loss, but not through a change in Citigroup’s mark-to-market accounting for the asset or the creation or increase of a


 

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related loss reserve. Once a loss is recognized under the agreement, the aggregate amount of qualifying losses across the portfolio in a particular period is netted against all recoveries and gains across the portfolio, all on a pretax basis. The resulting net loss amount on the portfolio is the basis of the loss-sharing arrangements between Citigroup and the USG. Citigroup will bear the first $39.5 billion of such net losses, which amount was determined using (i) an agreed-upon $29 billion of first losses, (ii) Citigroup’s then-existing reserve with respect to the portfolio of approximately $9.5 billion, and (iii) an additional $1.0 billion as an agreed-upon amount in exchange for excluding the effects of certain hedge positions from the portfolio. Net losses, if any, on the portfolio after Citigroup’s first-loss position will be borne 90% by the USG and 10% by Citigroup in the following manner:

 

•  

first, until the UST has paid $5 billion in aggregate, 90% by the UST and 10% by Citigroup;

•  

second, until the FDIC has paid $10 billion in aggregate, 90% by the FDIC and 10% by Citigroup; and

•  

third, by the Federal Reserve Bank of New York.

The Company recognized approximately $900 million of qualifying losses related to the portfolio (excluding replacement assets, as discussed in the note to the table below) from November 21, 2008 through December 31, 2008. These losses will count towards Citi’s $39.5 billion first-loss position.

The Federal Reserve Bank of New York will implement its loss-sharing obligations under the agreement by making a loan, after Citigroup’s first-loss position and the obligations of the UST and FDIC have been exhausted, in an amount equal to the then aggregate value of the remaining covered asset pool (after reductions for charge-offs, pay-downs and realized losses) as determined in accordance with the agreement. Following the loan, as losses are incurred on the remaining covered asset pool, Citigroup will be required to immediately repay 10% of such losses to the Federal Reserve Bank of New York. The loan is non-recourse to Citigroup, other than with respect to the repayment obligation in the preceding sentence and interest on the loan. The loan is recourse only to the remaining covered asset pool, which is the sole collateral to secure the loan. The loan will bear interest at the overnight index swap rate plus 300 basis points.

The covered asset pool includes U.S.-based exposures and transactions that were originated prior to March 14, 2008. Pursuant to the terms of the agreement, the composition of the covered asset pool, amount of Citigroup’s first-loss position and premium paid for loss coverage are subject to final confirmation by the USG of, among other things, the qualification of assets under the asset eligibility criteria, expected losses and reserves. This confirmation process is to be completed no later than April 15, 2009.

The agreement includes guidelines for governance and asset management with respect to the covered asset pool, including reporting requirements and notice and approval rights of the USG at certain thresholds. If covered losses exceed $27 billion, the USG has the right to change the asset manager for the covered asset pool.

The covered assets are risk-weighted at 20% for purposes of calculating the Tier 1 Capital ratio at December 31, 2008. This lower risk weighting added approximately 150 basis points to Citigroup’s Tier 1 Capital ratio at December 31, 2008.

The following table summarizes the assets that were part of the covered asset pool agreed to between Citigroup and the USG as of January 15, 2009, with their values as of November 21, 2008:

 

Assets (1)

  
In billions of dollars   November 21,
2008
Loans:    

First mortgages

   $ 98.9

Second mortgages

     55.2

Retail auto loans

     16.2

Other consumer loans

     21.3

Total consumer loans

   $ 191.6

CRE loans

   $ 12.4

Leveraged finance loans

     2.3

Other corporate loans

     11.1

Total corporate loans

   $ 25.8

Securities:

  

Alt-A

   $ 11.4

SIVs

     6.4

CRE

     2.1

Other

     12.0

Total securities

   $ 31.9

Unfunded Lending Commitments (ULC)

  

Second mortgages

   $ 22.4

Other consumer loans

     5.2

Leveraged finance

     0.2

CRE

     5.4

Other commitments

     18.3

Total ULC

   $ 51.5

Total covered assets

   $ 300.8

 

(1) As a result of the initial confirmation process (conducted between November 21, 2008 and January 15, 2009), the covered asset pool includes approximately $96 billion of assets considered “replacement” assets (assets that were added to the pool to replace assets that were in the pool as of November 21, 2008 but were later determined not to qualify). Loss-sharing on qualifying losses incurred on these replacement assets was effective beginning January 15, 2009, instead of November 21, 2008.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement with the UST, FDIC and the Federal Reserve Bank of New York (collectively, the USG) on losses arising on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). As consideration for the loss-sharing agreement, Citigroup issued non-voting perpetual, cumulative preferred stock and a warrant to the UST and FDIC.

The preferred stock issued to the UST and FDIC has an aggregate liquidation preference of $7.3 billion and an annual dividend rate of 8%. The warrant has a term of 10 years, an exercise price of $10.61 per share and is exercisable for approximately 66.5 million common shares. Citigroup received no additional cash proceeds for their issuance. Of the issuance, $3.5 billion of the consideration for the preferred stock, representing the fair value of the issued shares and warrant, will be treated as Tier 1 Capital for regulatory purposes, and it is expected to add approximately 30 basis points to the Tier 1 Capital ratio, on a pro forma basis, during the first quarter of 2009. The value of the premium ($3.5 billion) will be amortized and recognized as an expense over the life of the loss-sharing agreement.

The loss-sharing program extends for 10 years for residential assets and five years for non-residential assets. Under the agreement, a “loss” on a portfolio asset is defined to include a charge-off or a realized loss upon collection, through a permitted disposition or exchange, or upon a foreclosure or short-sale loss, but not through a change in Citigroup’s mark-to-market accounting for the asset or the creation or increase of a


 

44

Table of Contents

 

related loss reserve. Once a loss is recognized under the agreement, the aggregate amount of qualifying losses across the portfolio in a particular period is netted against all recoveries and gains across the portfolio, all on a pretax basis. The resulting net loss amount on the portfolio is the basis of the loss-sharing arrangements between Citigroup and the USG. Citigroup will bear the first $39.5 billion of such net losses, which amount was determined using (i) an agreed-upon $29 billion of first losses, (ii) Citigroup’s then-existing reserve with respect to the portfolio of approximately $9.5 billion, and (iii) an additional $1.0 billion as an agreed-upon amount in exchange for excluding the effects of certain hedge positions from the portfolio. Net losses, if any, on the portfolio after Citigroup’s first-loss position will be borne 90% by the USG and 10% by Citigroup in the following manner:

 

•  

first, until the UST has paid $5 billion in aggregate, 90% by the UST and 10% by Citigroup;

•  

second, until the FDIC has paid $10 billion in aggregate, 90% by the FDIC and 10% by Citigroup; and

•  

third, by the Federal Reserve Bank of New York.

The Company recognized approximately $900 million of qualifying losses related to the portfolio (excluding replacement assets, as discussed in the note to the table below) from November 21, 2008 through December 31, 2008. These losses will count towards Citi’s $39.5 billion first-loss position.

The Federal Reserve Bank of New York will implement its loss-sharing obligations under the agreement by making a loan, after Citigroup’s first-loss position and the obligations of the UST and FDIC have been exhausted, in an amount equal to the then aggregate value of the remaining covered asset pool (after reductions for charge-offs, pay-downs and realized losses) as determined in accordance with the agreement. Following the loan, as losses are incurred on the remaining covered asset pool, Citigroup will be required to immediately repay 10% of such losses to the Federal Reserve Bank of New York. The loan is non-recourse to Citigroup, other than with respect to the repayment obligation in the preceding sentence and interest on the loan. The loan is recourse only to the remaining covered asset pool, which is the sole collateral to secure the loan. The loan will bear interest at the overnight index swap rate plus 300 basis points.

The covered asset pool includes U.S.-based exposures and transactions that were originated prior to March 14, 2008. Pursuant to the terms of the agreement, the composition of the covered asset pool, amount of Citigroup’s first-loss position and premium paid for loss coverage are subject to final confirmation by the USG of, among other things, the qualification of assets under the asset eligibility criteria, expected losses and reserves. This confirmation process is to be completed no later than April 15, 2009.

The agreement includes guidelines for governance and asset management with respect to the covered asset pool, including reporting requirements and notice and approval rights of the USG at certain thresholds. If covered losses exceed $27 billion, the USG has the right to change the asset manager for the covered asset pool.

The covered assets are risk-weighted at 20% for purposes of calculating the Tier 1 Capital ratio at December 31, 2008. This lower risk weighting added approximately 150 basis points to Citigroup’s Tier 1 Capital ratio at December 31, 2008.

The following table summarizes the assets that were part of the covered asset pool agreed to between Citigroup and the USG as of January 15, 2009, with their values as of November 21, 2008:

 

Assets (1)

  
In billions of dollars   November 21,
2008
Loans:    

First mortgages

   $ 98.9

Second mortgages

     55.2

Retail auto loans

     16.2

Other consumer loans

     21.3

Total consumer loans

   $ 191.6

CRE loans

   $ 12.4

Leveraged finance loans

     2.3

Other corporate loans

     11.1

Total corporate loans

   $ 25.8

Securities:

  

Alt-A

   $ 11.4

SIVs

     6.4

CRE

     2.1

Other

     12.0

Total securities

   $ 31.9

Unfunded Lending Commitments (ULC)

  

Second mortgages

   $ 22.4

Other consumer loans

     5.2

Leveraged finance

     0.2

CRE

     5.4

Other commitments

     18.3

Total ULC

   $ 51.5

Total covered assets

   $ 300.8

 

(1) As a result of the initial confirmation process (conducted between November 21, 2008 and January 15, 2009), the covered asset pool includes approximately $96 billion of assets considered “replacement” assets (assets that were added to the pool to replace assets that were in the pool as of November 21, 2008 but were later determined not to qualify). Loss-sharing on qualifying losses incurred on these replacement assets was effective beginning January 15, 2009, instead of November 21, 2008.

EXCERPTS ON THIS PAGE:

10-K (4 sections)
Feb 27, 2009

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