Citibank & AIG

Bailouts for Citibank and AIG continues...looks like its going to be a marathon for the financial crisis...

===================================

24 Feb 09 (FT)
AIG in talks for third bail-out as insurer is braced for huge losses

AIG is in talks with the US government over a new bail-out aimed at giving the stricken insurer, which is already 80 per cent-owned by the authorities, fresh capital to absorb an expected fourth-quarter loss and more time to sell assets.

People close to the situation said AIG could announce the new rescue plan as early as next week, together with fourth-quarter results that are likely to show a loss bigger than the $24.5bn reported in the previous three months.

A new bail-out of AIG would be the third time in five months that the US taxpayers have come to the rescue of a company that was once a global insurance powerhouse and is now fighting for its survival.

Under the planned bail-out, which has not yet been finalised and could still change, the government would swap some of the $60bn five-year loan it extended to AIG in November, and maybe some of the $40bn in preferred stock it owns, for equity.

The debt could also be swapped for new obligations with different terms in order to give AIG more time to repay the loan. The company has been slow in selling off assets to pay back the government aid as potential buyers struggled to raise funds.

In return for the additional capital, AIG could cede ownership of some of its businesses or assets to the government. The government would then securitise them, putting them in discreet funds to be managed by outside managers.

AIG declined to comment on the size of its fourth-quarter losses but confirmed the talks with the authorities. "We continue to work with the Federal Reserve Bank of New York to evaluate potential new alternatives for addressing AIG's financial challenges," it said.

The US Treasury and the Fed declined to comment. People close to the situation said that AIG and the government would try to keep the authorities' stake in the company to about 80 per cent but added that the Fed and Treasury could take full control of some of the insurer's businesses or portfolio of assets.

Citi close to deal with Treasury (FT)
Citigroup and the US Treasury are nearing agreement on a deal that would give the federal government a stake of about 40 per cent in the troubled bank in exchange for bolstering its depleted capital base.

People close to the situation said no agreement had yet been reached and the government had yet to give its approval to the plan proposed by Citi, which stops short of outright nationalisation. But they added that negotiations between Citi’s executives and Treasury officials had made progress since the weekend and an announcement could come as early as Wednesday or Thursday.

Insiders say the deal, revealed by the Financial Times, centres on the conversion of part of the government’s $45bn of preferred shares into Citi’s common stock – up to a stake of about 40 per cent. Other shareholders, which include sovereign wealth funds and pension funds, would also convert some of their $30bn-plus of preferred stock into shares.

Citi, headed by Vikram Pandit, might add more capital through an equity offering. The moves would boost Citi’s capital base by adding more common stock without forcing the government and other investors to spend more money. But it would severely dilute other shareholders’ stakes.

Crucial details, such as the price of conversion and the stake the government will hold in Citi, are still to be finalised, people familiar with the talks said. Citi declined to comment.

In recent days, the capital markets have been unnerved by uncertainty over the terms of the deal, the likely losses to be suffered by equity and bond investors and the effects on Citi’s operations.

Citi shares rebounded more than 21 per cent on Tuesday on investors’ hope for a resolution and positive comments on the sector by Ben Bernanke, chairman of the Federal Reserve.
The cost of protecting against a default on Citi’s debt fell after trading around its record high earlier in the day.

Regulators are due to begin “stress testing” banks’ ability to withstand a sharp economic downturn. The government has said it does not want to nationalise banks but has not ruled out taking large stakes in ailing institutions as a temporary measure.

Bank of America, which has already received $45bn from the government, has been seen as the next institution in line for a rescue but it has said it is not in talks with government officials.