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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

During the first three weeks of November 2008, Citigroup’s stock price dropped almost 80%, and its credit default swap spreads spiked as the market lost confidence in the bank’s ability to honor its commitments. Counterparties pulled away, and regulators determined Citi’s failure would constitute a systemic risk. On November 23, 2008, the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation announced a package of measures to rescue Citi, which included an Asset Guarantee Program (AGP) to cover $306 billion in Citi’s assets and an ad hoc capital injection—the Targeted Investment Program (TIP). Under the guarantee, Citi would absorb the first $39.5 billion in losses; the FDIC, Treasury, and Citi agreed to share losses on the next $16.7 billion, with the Fed agreeing to provide a nonrecourse loan to Citi for 90% of additional losses. On December 31, 2008, the Treasury used Troubled Assets Relief Program funds to inject $20 billion in capital into Citi. This injection was later subsumed under the TIP, which was officially announced on January 2, 2009. Under the TIP capital injection, the Treasury received $20 billion in senior preferred shares and stock warrants. On July 30, 2009, the Treasury exchanged its preferred shares obtained under TIP for new trust preferred securities, strengthening some of Citi’s capital ratios. In July 2009, the Treasury also exchanged $25 billion in preferred shares through the Capital Purchase Program (CPP) for common stock equivalent, which automatically converted into common stock in September 2009. On December 23, 2009, Citi repaid the Treasury’s $20 billion TIP investment and terminated the AGP. Between April and December 2010, the Treasury sold off all its holdings of Citi’s common stock associated with the CPP. On January 25, 2011, the Treasury sold all warrants from the Citi TIP for a total proceed of $190.4 million, through a registered public offering. Between the disposition of warrants and dividend payments, the Treasury received $1.8 billion (excluding interest expense) in income from the Citi TIP investment.

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