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Document Type

Case Study

Case Series

Ad hoc Emergency Liquidity Programs

Abstract

By November 21, 2008, against the backdrop of heavy losses during the Global Financial Crisis, Citigroup counterparties were substantially pulling back from the firm. On November 23, the US Department of the Treasury, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve announced a support package for Citi composed of a capital injection and a loss-sharing arrangement on $300.8 billion of assets. Under the Asset Guarantee Program (AGP), Citi would absorb the first $39.5 billion in losses on a mutually agreed upon pool of risky assets; the Treasury and FDIC provided $15 billion in loss protection after that, combined with Citi’s absorbing an additional $1.7 billion; and the Fed provided residual financing in the form of a loan facility to Citi to cover any losses on the guaranteed assets that exceeded $56.2 billion, subject to a 10% loss-sharing agreement with Citi. The Fed’s participation was essential to the AGP because the central bank was the only agency that could provide a loan large enough to cover the entire asset pool. This message mattered to the market at the time—it signaled that the government wasn’t going to allow the systemic bank to fail. However, the Fed never expected to make a loan under the loan facility, as it forecast Citi’s losses on the asset pool would be substantially less than the amount covered by Citi, the Treasury, and the FDIC—even under stress. For Citi, part of the value of the AGP was that the regulators allowed the bank to report significantly higher regulatory capital ratios. Market participants responded favorably to the AGP, even though Citigroup remained responsible for the first losses, owing to the widespread fears of catastrophic losses at the time. Ultimately, Citi’s losses on the asset pool were just $10.2 billion, and the guarantees provided by the three agencies were never triggered.

Date Revised

2025-04-15

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