Government Will Protect Citi on $306B in Mortgages

The government's just-announced rescue of Citigroup will protect the financial services giant from large losses on a $306 billion pool of residential and commercial mortgage securities and will lead to an expansion of the bank's loss mitigation efforts to help troubled homeowners. Citigroup announced an ambitious loss mitigation program on Nov. 11 and said it has adopted a streamlined loan modification model similar to one developed by Federal Deposit Insurance Corp. But the rescue package, developed by the Federal Reserve, Treasury Department and FDIC, says the government will provide Citigroup with a "template to manage guaranteed assets. This template will include the use of mortgage modification procedures adopted by the FDIC, unless otherwise agreed." FDIC chairman Sheila Bair generally considers the FDIC model to be superior to the models adopted by the banks and Fannie Mae and Freddie Mac. Citigroup has agreed to absorb the first $29 billion in losses on the $306 billion pool and the government will absorb 90% of future losses for 10 years on residential assets and five years on commercial real estate assets. In providing this guarantee, regulators reduced the capital risk weighting on the $306 billion, which freed up $16 billion in existing capital for Citi. Treasury also provided Citigroup with a new $20 billion capital infusion - on top of the $25 billion it received earlier on the TARP program.