The U.S. government is buying a US$20-billion stake in Citigroup and guaranteeing more than US$300 billion in toxic assets held by the company.
In exchange for the $20-billion investment and guarantees, the U.S. Treasury Department will receive $27-billion in preferred stock in Citigroup with an 8 per cent dividend to the Treasury.
The investment cash will come from the $700-billion U.S. bailout package announced earlier this year.
The deal provides protection for Citigroup against the possibility of losses on approximately $306 billion in toxic assets -- primarily residential and commercial real estate -- held by the company.
Under the loss-sharing deal, Citigroup will take on the first $29 billion from any losses incurred from the toxic assets.
After that, the government will absorb 90 per cent of the remaining losses and Citigroup will swallow the remaining 10 per cent.
The plan, which was announced late Sunday, is aimed at restoring confidence in the U.S. banking giant after its stock fell 60 per cent last week.
"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. said in a joint statement.
"We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks."
The deal also requires Citigroup to take action to help homeowners in distress. The company will now be forced to modify mortgages to help customers avoid foreclosure.
Citi's chief executive officer Vikram S. Pandit welcomed the government intervention in a press release on Monday.
"This weekend, the U.S. government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi's stock price," Pandit said.
"We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity. We appreciate the tremendous effort by the government to assure market stability."
Last week, Citigroup announced 53,000 jobs would be cut in the coming quarters as it tries to restructure.
Pandit said the company is still committed to streamlining its business and to providing "outstanding banking services" to clients around the globe.
"We will continue to focus on opportunities and alternatives to further enhance the company's overall position and value," he concluded.
The transaction has been unanimously approved by the Citigroup board of directors.
Winson Fong, managing director at SG Asset Management in Hong Kong, said if the U.S. government didn't step in "it would create chaos."
"Simply put, you couldn't borrow or lend for a while. This is a nightmare scenario," Fong told The Associated Press.
The bailout is the latest in a series of similar rescue efforts by the U.S. government.
In March, the Fed helped finance JPMorgan Chase's buyout of Bear Stearns. Six months later, the government took over failing mortgage giants Fannie Mae and Freddie Mac and helped out insurer American International Group.
In morning trading, Citi shares jumped 56 per cent to US$5.89.
"Clearly, this will stabilize the (banks) group near term, and the stocks this morning should reflect it," Oppenheimer & Co analyst Meredith Whitney told Reuters. "We are still cautious on the potential future dilution from further prospective capital raises for the group as well as continued higher losses related to credit and asset deflation."
Citigroup has about 200 million customers and operates in more than 100 countries.
With files from The Associated Press
