Ad-Hoc Emergency Liquidity

United States: Citigroup Emergency Liquidity Program, 2008

Announced: November 23, 2008

Purpose

to support the Asset Guarantee Program and thus “provide financial support to Citigroup and promote financial stability” (Fed 2008b, 1)

Key Terms

Announcement Date
November 23, 2008
Operational Date
January 15, 2009
Termination Date
December 23, 2009
Legal Authority
Section 13(3) of the Federal Reserve Act
Administrator
Federal Reserve Bank of New York (FRBNY)
Peak Authorization
$244.8 billion residual financing facility as part of the $300.8 billion asset guarantee
Peak Outstanding
Loan never activated
Haircut/Recourse
Described by the Fed as nonrecourse, yet Citi would absorb the first $39.5 billion in losses and 10% of losses after that and pay interest on the full $244.8 billion if it drew on the facility. The Fed retained recourse for interest payments and Citi’s portion of the loss-sharing arrangement
Interest Rate and Fees
OIS + 300 basis points
Term
Term varied depending on draw date; nonrenewable
Part of a Package
Treasury and FDIC loss-sharing arrangements; Treasury capital injection
Outcomes
The FRBNY never made a loan under the loan facility
Notable Features
The loan facility was contingent on large Citi losses to an extent that the Fed did not expect to ever lend

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.

This case study is about ad hoc emergency liquidity provided to Citigroup, Inc. by the Federal Reserve. For a review of the related ad hoc capital injection, see Hoffner and Arnold (2024).

As of September 30, 2008, Citi was one of the largest financial institutions in the United States and globally. Citi was a major supplier of credit, with $277 billion in domestic and $500 billion in foreign deposits (Fed 2008b). From November 17–21, Citi’s common stock lost more than half its value, ending the week at $3.77. By Friday, November 21, Citi counterparties were substantially pulling back from the firm, limiting transactions with the bank, refusing to extend credit, shortening or terminating short-term funding, and differentiating Citi’s collateral from its peers’. By mid-November, holders of Citi debt were making margin calls, and investors began to ask Citi questions about its viability (SIGTARP 2011). By close of business on Friday, November 21, Citi’s liquidity position had reached crisis proportions and concerns had become widespread in the market that, absent US government intervention over the weekend, Citi might fail (FCIC 2011).

On November 22, 2008, Citi approached the government and proposed a ring-fencing arrangement for its troubled assets in which the government would protect against 100% of the losses on the asset pool (SIGTARP 2011). The government did not agree to those terms; yet, on November 23, the Treasury, Federal Deposit Insurance Corporation (FDIC), and Fed announced a revised interagency support package to Citi to support the stability of financial markets (USG 2008). The package consisted of (1) capital injection via the Treasury purchase of $20 billion in senior preferred stock through the Targeted Investment Program (TIP) (Fed 2008b); and (2) a loss-sharing agreement by the government, the Asset Guarantee Program (AGP), for $306 billion of assets (the asset pool) (later negotiated to $300.8 billion by the time the parties signed a binding contract) (SIGTARP 2011). The asset pool would be composed of loans and securities backed by residential or commercial real estate, as well as any other assets that the government and Citi agreed were eligible (Fed 2008a). The first $56.2 billion in losses on the asset pool would be borne by Citi, the Treasury, and the FDIC; see Figure 1. Treasury would provide $5 billion in loss guarantees, and the FDIC would provide $10 billion in loss guarantees (Citi, Treasury, FDIC, and FRBNY 2009a; Fed 2008b).^FN

The Fed described the loan facility as “residual financing.” In the event losses exceeded $56.2 billion, the Fed committed to provide a one-time emergency loan covering 90% of the remaining value of assets in the asset pool, through the Federal Reserve Bank of New York (FRBNY). In other words, if the value of the assets were unchanged at $300.8 billion, the size of the loan would be $220.4 billion. That loan would be collateralized against the asset pool. Citi would compensate the Fed for 10% of any losses it realized on its residual financing of the asset pool via immediate prepayment to the FRBNY. Citi would also pay the Fed interest on the loan (equal to 90% of the remaining assets in the asset pool) as long as it was in place (Citi, Treasury, FDIC, and FRBNY 2009a; SIGTARP 2011).

However, even in the most stressed scenario interagency staff analyzed, the Federal Reserve expected that losses on the asset pool would not exceed $43.9 billion. For that reason, the FRBNY never expected to lend through the loan facility (SIGTARP 2011). According to Jason Cave, an FDIC official party to the government negotiations, the Fed’s participation in the AGP through its contingent loan facility was primarily for the announcement or signal effect, and its contingent loan facility was not strictly necessary in a financial sense because of the low likelihood Citi would use it (Cave 2024).

Figure 1: Citigroup Asset Guarantee Program Structure

Citigroup Asset Guarantee Program Structure Sources: Brookings and YPFS 2018.

Eligible losses under the loan facility included charge-offs and realized losses on collection, short-sale losses, foreclosures, and losses through a permitted disposition or exchange but did not include mark-to-market unrealized losses or an increase in related loss reserves (Fed 2009).

Ultimately, Citi’s losses on the asset pool were just $10.2 billion, and the guarantees provided by the three agencies were never triggered (SIGTARP 2012). Owing to the limited losses, the FRBNY never activated the loan facility (GAO 2011). On December 23, 2009, Citi and the government terminated the Master Agreement, which governed the loan facility, thereby ending the FRBNY’s loan facility. Citi paid the FRBNY a $50 million termination fee and agreed to reimburse its out-of-pocket expenses associated with administering the loan facility (Citi, Treasury, FDIC, and FRBNY 2009c; Fed 2010). Figure 2 shows a timeline of the key events in the Citi AGP ring-fencing intervention.

Figure 2: Timeline of Citigroup Asset Guarantee Program

Timeline of Citigroup Asset Guarantee Program Source: FRBNY 2009b; author’s analysis.

Market participants applauded the Citi package of November 23, 2008, including, specifically, the Asset Guarantee Program. In a report the next day, Moody’s emphasized that the AGP reduced Citigroup’s “tail risk.” Moody’s said:

Prior to the announcement of the U.S. support package, the key focus of Moody’s downgrade review was the potential impact that further deterioration in asset quality could have on Citigroup’s capital adequacy. Moody’s said that the U.S. package gives greater clarity to the potential credit costs Citigroup faces . . . [The guarantee] substantially reduces Citigroup’s ‘tail risk’ exposures to these assets which represented a major concern for Moody’s. The government’s actions establish an upper limit to the loss potential of these assets. Further, under the worse-case assumptions of loss-realization, Moody’s believes that Citigroup has the capacity to absorb the losses for which it would be responsible under this package. (Moody’s 2008)

JPMorgan analysts said that the Citi AGP was beneficial for Citi, financial markets, and the larger economy and said that the “stabilization of Citi is a critical step as a failure may have further seriously damaged consumer confidence and created panic globally” (Juneja, Sun, and Curcuruto 2008, 1). A UniCredit analyst said that the Citi AGP would dispel “once and forever” doubts about Citi’s health and would put the bank “on solid footing” (Crepaz 2008, 1). Morgan Stanley analysts said that the Citi AGP was a creative solution and “a strong positive for the system and for Citi shareholders” (Graseck and Pate 2008, 2).

On the Monday following the announcement of the government package, the market responded positively, and Citi’s shares closed up 58% (FCIC 2011). Credit default swap (CDS) spreads for financial and some nonfinancial institutions began to narrow after the government announced the support package (Fed 2009). However, just weeks after the AGP announcement, Citi’s stock prices continued to fall and CDS spreads continued to widen. Figure 3 shows Citi’s stock and CDS prices before and after the AGP announcement.

Figure 3: Citi Common Equity and Credit Default Swap Prices, 2008–2009

Citi Common Equity and Credit Default Swap Prices, 2008–2009

Sources: Center for Research in Security Prices; LSEG Refinitiv DataStream; author’s calculations.

According to an Office of the Comptroller of the Currency (OCC) official, indications of deposit outflows emerged at Citi on Monday morning Asia time (Sunday evening Eastern US time) but slowed when the government made its support package announcement (SIGTARP 2011).

In its annual supervisory review of Citi as of December 31, 2008, the FRBNY downgraded Citi’s supervisory rating from “fair” to “marginal” and gave Citi a supervisory score of 444/4 (the best score being 111/1 and the worst being 555/5) (FRBNY 2009). As such, Citi would require “close supervisory attention and substantially increased financial surveillance” (FRBNY 2009). In a January 2009 confidential supervisory document, FRBNY staff wrote that “without prompt action [by Citi], the organization’s future viability could be impaired” (FRBNY 2009). Because of Citi’s low ratings, the FRBNY said that it would intensify communication with Citi’s board of directors and require senior management to revise its corrective action plan (FRBNY 2009).

According to one FRBNY official, the government package worked by “convincing the skittish market that the Federal Government was taking the risk, even though the risk really remained with Citigroup” (SIGTARP 2011, 22). However, Jason Cave, an FDIC official involved in the AGP negotiations, told YPFS that in his view the broader AGP was not worth doing, given that it didn’t resolve Citi’s challenges—since the government later had to further boost the bank’s capital by converting preferred shares into common equity—and that it was “way too complicated” (Cave 2024, 21).

Some observers discounted the regulatory capital benefits, which Citigroup had emphasized in its press release on the Asset Guarantee Program and recapitalization. Market participants were already beginning to focus on capital’s true loss-bearing capacity—analysis that looked more favorably upon common shares than the preferred shares that Treasury was purchasing. For example, despite its positive view of the asset guarantee, Moody’s said it was leaving Citigroup on review for downgrade because:

Citigroup still faces the challenge of generating or attracting equity in order to decrease its reliance on hybrid securities in its capital structure. The hybrid component of Citigroup’s capital has increased as a result of the U.S. Government preferred investment, and Moody’s views this as less permanent than common equity. (Moody’s 2008)

By February, the market had begun focusing on tangible common equity, having largely discounted regulatory capital, and rumors spread that the government was going to nationalize Citi (Geithner 2014).

Additionally, Deutsche Bank analysts, similarly despite an overall positive view of the asset guarantee and that it protected against extreme losses, said it did little to change their base-case expectations for Citi:

We assume lifetime losses on Citi’s loans and securities of $80B, and it is not clear that this will change. The [ring-fence] protection applies to only 15% of Citi’s assets, for which Citi must absorb the first $29B (not far from our base case estimate for these assets). The other 85% is not covered and includes credit card, international loans, and large corporate exposures, which comprise about over $500 billion on balance-sheet exposures alone, and should be under stress over the next year. In short, the extreme scenarios may be protected but our base case is not protected as much. (Mayo and Spahr 2008)

Key Design Decisions

Purpose1

As of September 30, 2008, Citi was the second-largest bank in the United States, with more than $2 trillion in assets; its largest banking subsidiary, Citibank, N.A., was the third-largest insured depository institution in the country. Citi was also a major counterparty to many institutions globally and played a central role in payments clearing, investment banking, asset management, and brokerage services worldwide (Fed 2008b).
By November 2008, Citi had significant amounts of commercial paper and long-term senior and subordinated debt outstanding. Citi had posted losses of $10.4 billion in 2008 through the third quarter—partially as a result of its exposure to mortgage-related assets. In the weeks leading up to November 23, investors had become concerned about Citi’s viability, and the firm began struggling to raise funding (Fed 2008b). Then–Treasury Secretary Hank Paulson thought that Citi was “teetering on the brink of failure” by mid-November 2008 (SIGTARP 2011, 3).
On November 23, 2008, the Fed said that it would provide contingent financing for certain losses on the to-be-determined asset pool to restore confidence in Citi and support financial stability (Fed 2008b). The purpose of the Asset Guarantee Program, which the Fed’s loan facility supported, was to address market fears that Citigroup faced further catastrophic losses. Officials felt that they had no other options to do this:
In Treasury’s view, asset guarantees would ‘calm market fears about really large losses,’ thereby encouraging investors to keep funds in Citigroup and Bank of America. When asked to discuss possible alternatives to asset guarantees and why they were not selected, Treasury indicated that no alternatives were seriously considered. (COP 2009, 38)
Fed officials believed that a Citi failure would have been destabilizing to the global financial system by disrupting numerous markets. Then–Fed Chairman Ben Bernanke said that a Citi failure could have resulted in blocked access to ATMs and halted the issuance of paychecks. An FDIC official told the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) that the impacts of a Citi failure on money market liquidity could have been global in scope (SIGTARP 2011). The Treasury said that a driving motivation behind the AGP for Citi (and for Bank of America) was a fear that if Citi failed, it would result in “the same deep, systemic damage as Lehman Brothers’ collapse” (COP 2009, 37). On the weekend of November 22–23, 2008, at least one participant in a meeting of officials from the Fed, OCC, and FDIC said the goal of supporting Citi was to avoid a “large worldwide bank run” (SIGTARP 2011, 15).
On Saturday, November 22, 2008, at 3:36am, Citi delivered to the FRBNY a proposal for government assistance. In its proposal, Citi asked that the government cover 100% of losses on a ring-fenced asset pool of $306 billion, for which Citi would compensate the government with $20 billion in preferred shares. Then–Citi CEO Vikram Pandit said the proposal was based off a similar proposal that Citi and the FDIC had crafted for its earlier proposed acquisition of Wachovia (see Appendix). The Citi officials also said it was important to them to get regulators to approve a 20% risk weight for the assets in the asset pool. The lower risk weight would result in a significant reduction in the bank’s regulatory capital requirement and make it easier for it to report to the market that it was in compliance with regulatory requirements. At noon, the government parties rejected the proposal and submitted to Citi a new proposal on Sunday (SIGTARP 2011). The Fed Board of Governors discussed and approved the proposed loan facility at its November 23, 2008, meeting (Fed 2008d). Figure 4 shows the difference between the original Citi proposal (November 22) and the ultimate government proposal (November 23).
Figure 4: Citi AGP Proposals: November 22 and November 23, 2008
Source: SIGTARP 2011.
The concept behind the AGP structure was modeled from a similar guarantee framework earlier created by Citi and the FDIC to support Citi’s (eventually outbid) bid for the acquisition of Wachovia in September of 2008 (see Appendix for a brief overview of the proposed package) (COP 2009).
According to the Congressional Oversight Panel (COP), the Fed’s participation was essential to the Asset Guarantee Program because the central bank was the only agency that could provide a nonrecourse loan large enough to cover the entire asset pool. Citing Treasury officials, the COP wrote in a November 2009 report:
The TARP [Troubled Assets Relief Program] purchasing authority [was] reduced dollar-for-dollar by the amount guaranteed, meaning that insuring an asset under Section 102 of EESA [had] almost an equivalent impact on TARP purchasing authority as purchasing the same asset. Treasury needed the joint participation of the Federal Reserve and the FDIC to cover the sizeable Citigroup and Bank of America guarantees. While the Federal Reserve would provide financing only after the loss sharing agreements with Treasury and the FDIC were exhausted, it [was] the only agency that could provide a non-recourse loan of large notional value, if necessary, because of its emergency lending authority under Section 13(3) of the Federal Reserve Act. (COP 2009, 39) [emphasis added; COP citations omitted]
In other words, allocating TARP funds to cover the full amount of the Asset Guarantee Program would have burned through more than one-third of the entire $700 billion Congress had allocated to Treasury under the program.
On the other hand, the Fed’s contingent loan facility was not strictly necessary in a financial sense because of the low likelihood Citi would use it, according to Cave at the FDIC. In his view, the main value of the Fed’s participation in the AGP was the announcement or signaling effect with the public and its sister agencies (Cave 2024). Treasury Secretary Paulson wrote in a public letter to Fed Chair Bernanke that the Fed’s participation “was necessary to prevent the substantial disruption to financial markets and the economy that could well have occurred because of loss of market confidence in Citigroup” (Paulson 2009).
Other Options
Citi leadership initially told the FDIC that all Citi needed was expanded access to the Fed’s liquidity facilities (FCIC 2011). However, the FDIC dismissed this option on the basis that (a) any “incremental liquidity” would be quickly eliminated by deposit outflows; and (b) Citi did not have adequate high-quality collateral to access the Fed’s facilities (FCIC 2011, 381).^FN
At least some at the FDIC thought that the FDIC’s loss position in the ultimate Asset Guarantee Program would result in systemic harm. The concern was that the size of the loss to the Deposit Insurance Fund (DIF) would be systemically damaging since it would likely deplete the DIF, resulting in a large special assessment on banks, which would deplete systemic bank capital to a harmful degree, potentially even causing other bank failures that would cost the DIF even more. This could have also led to a loss of credibility for the FDIC in future guarantees—both as depositor insurer and in its temporary role as systemwide guarantor of senior bank debt (Krimminger, Murton, and Thomas 2008).
The FDIC initially had considered alternatives to taking a loss position in a ring-fencing arrangement. One proposal was to use TARP funds to do a capital injection while the Securities and Exchange Commission (SEC) banned short selling, the Fed provided liquidity to Citi, and the FDIC guaranteed all Citi creditors. Another approach—called the Conduit Approach—involved the creation of an FDIC asset conduit to purchase assets from Citi and then sell them later. The conduit would be funded with TARP funds and would have access to Fed liquidity facilities in order to provide leverage (Krimminger, Murton, and Thomas 2008). Generally, the FDIC had considered a good bank–bad bank restructuring framework as an alternative to the AGP, but FDIC staff said ex post that such a restructuring of Citi would have been implausible at the time.
On Saturday, November 22, 2008 (the day before the government announced the AGP), numerous other options were on the table, including: (a) the creation of a government conservatorship in the style of those created for Fannie Mae and Freddie Mac, (b) the creation of a public-private investment fund to buy troubled assets from Citi, and (c) further TARP capital injections (SIGTARP 2011). Citi was also considering on November 22 the sale of its whole business or parts of its business, as well as the replacement of its CEO, who had been installed on December 11, 2007 (Citi 2009b; FactSet 2008).
The FDIC had been considering a variety of “open bank” assistance measures since it became concerned about the systemic risk posed by Citi’s weakness (Wigand and Held 2008). The FDIC also considered providing assistance on the “liability side” (Richardson et al. 2008). The government in general, including Treasury, had considered injecting capital via common equity shares but decided against that due to concern about government ownership (Cave 2024).
Ultimately, the government parties said that the asset guarantee of the ring-fenced assets would be far less costly to the government and would be replicable for other institutions that could come under similar pressures (SIGTARP 2011). According to the Treasury, none of the other options were “seriously considered” (COP 2009, 38). However, Citi took advantage of several widely available assistance programs that resembled the other options; see Key Design Decision No. 2, Part of a Package.

Part of a Package1

The loan facility facilitated the Asset Guarantee Program, which also included loss-sharing provisions from the Treasury and FDIC. Citi also received an additional Treasury TARP capital injection (Fed 2008b).
Under the Asset Guarantee Program, the Treasury and FDIC agreed to guarantee ring-fence-eligible assets by taking second- and third-loss positions, respectively, behind a first-loss layer retained by Citi. In compensation for their loss protection, Citi would issue the Treasury and FDIC $4 billion and $3 billion, respectively, in preferred stock bearing an 8% coupon (Fed 2008b). Treasury also received warrants for the purchase of common stock at a strike price of $10.61 per share, representing an exercise value of $705.6 million. That is, regardless of the market price, the government could acquire common stock at $10.61 per share, which would provide $705.6 million of capital to Citi (the government also had the option of selling the warrants without exercising them).
At the same time as it agreed to the AGP, Treasury agreed to purchase $20 billion in senior preferred stock bearing an 8% coupon with TARP funds through Targeted Investment Program (TIP) (see Hoffner and Arnold [2024]). Citi received the TIP capital injection on December 31, 2008 (SIGTARP 2011). As part of TIP, the Treasury received additional warrants for the purchase of common stock at a strike price of $10.61 per share, for an exercise value of $2 billion. In this case, full exercise of the warrants would have provided $2 billion of capital to Citi (Fed 2008b).
By the time it received this government support, Citi had utilized several other broad-based crisis response programs. As of Friday, November 21, 2008, Citi had $24.3 billion outstanding under the Fed’s collateralized liquidity facilities; had $200 million outstanding under the Fed’s Commercial Paper Funding Facility; had borrowed $84 billion from the Federal Home Loan Bank System; and had received $25 billion in TARP capital injections under the Capital Purchase Program (FCIC 2011). Citi’s bank subsidiaries also had standing access to the Fed’s discount window.
On November 22, 2008, at 11:14pm, Citi asked the FRBNY to double its access to the Commercial Paper Funding Facility; the FRBNY denied the request (SIGTARP 2011). On November 23, 2008—concurrent with the announcement of the government package—the Fed authorized the extension of credit to Citi’s London-based broker-dealer under the Primary Dealer Credit Facility (Fed 2009). Citi’s London broker-dealer immediately began borrowing daily from the facility (Fed 2020). By December, Citi had issued $32 billion in senior debt covered by the FDIC’s guarantee program (FCIC 2011). At year-end 2008, Citi also had $60.1 billion in non-interest-bearing deposits in the US, all of which would have likely qualified for the FDIC’s Transaction Account Guarantee Program (Citi 2009b; Vergara 2022). In this program, for which all banks were automatically enrolled unless they opted out, the FDIC provided unlimited deposit insurance, for a fee, to non-interest-bearing transaction accounts and other low-interest-bearing accounts (Davison 2019).
Regulatory Treatment/Relief
As of December 31, 2008, regulators assigned the asset pool a favorable 20% risk weighting for purposes of calculating Tier 1 capital, the standard risk weighting for AAA-rated corporate credits under Basel capital standards (BIS 2004; Citi 2008). A 20% risk weight would have required them to hold just $4.8 billion of capital against the $300.8 billion asset pool. (Under regulatory capital standards, the risk weighting is multiplied by a standard 8% capital requirement, resulting in 1.6% requirement for assets with a 20% risk weighting.) In contrast, the company held roughly $21 billion in capital against the asset pool assets before the transaction, based on its statement that the transaction freed up $16 billion in capital.^FN According to then–Citi Vice Chairman Ned Kelly, the capital relief obtained by Citi in part through the risk-weighting of the asset pool (and in part through the capital injection) was the reason that Citi ultimately accepted the deal (SIGTARP 2011).
Regulators granted a 20% risk weight to the asset pool, despite Citi’s remaining exposed to the first $39.5 billion in losses. Citi had already reserved $9.5 billion against the assets in the asset pool; the asset pool would ultimately lose $10.2 billion by the time of termination of the AGP (it remains unclear if that $10.2 billion in losses included the original $9.5 billion in loss reserves or was in excess of it; no sources indicate that it was in excess of the loss reserves) (SIGTARP 2012).

Legal Authority1

Section 13(3) of the Federal Reserve Act (FRA) (12 U.S.C. § 343) provided the legal authority for the Fed to create and lend through the loan facility. The Fed Board voted to invoke Section 13(3) on November 23, 2008 (Fed 2008b). Section 13(3) permitted the Fed, “in unusual and exigent circumstances,” to provide liquidity to “any individual, partnership, or corporation,” provided the assistance was “secured to the satisfaction” of the Fed (US Congress 2008a, vol. 12 U.S.C. Ch. 3 [12 U.S.C. § 343]). The invocation of Section 13(3) allowed the Fed to provide liquidity more broadly than its monetary policy and discount window authorities allowed (US Congress 2008a, vol. 12 U.S.C. Ch. 3, secs. 10B, 13, 14).
Fed legal staff and policymakers had consistently interpreted Section 13(3)’s “secured to the satisfaction” requirement as meaning that the Fed had to be reasonably confident of full repayment (Alvarez 2022). In other words, while the Fed might take some losses in 13(3) lending, to provide liquidity under Section 13(3), the Fed had to make the ex ante determination that it would be repaid (Alvarez 2022). The FRBNY engaged an external vendor to conduct a stress scenario on the asset pool, the conclusion of which was that losses on the asset pool were unlikely to exceed $56.2 billion (the threshold at which the FRBNY would be required to provide a loan) (GAO 2011) (see Key Design Decision No. 10, Balance Sheet Protection).
Yet, notably, the Fed loan would be made only in the event that losses exceeded the protection layers that were subordinated to the Fed. The Fed then–General Counsel Scott Alvarez later said of this that even in that setting of deteriorating collateral values and no recourse (except to interest and Citi’s portion of the loss-sharing), the 90-10 loss-sharing agreements were adequate to secure the Fed to its satisfaction given the greater discount to par value that would then be prevailing and the Fed’s ability to hold the collateral until it recovered value (Alvarez 2022).
Given that the Citi AGP had a maturity of five or 10 years (see Key Design Decision No. 9, Loan Duration), it was possible that the Fed’s loan facility lending commitment could have been active after the “unusual and exigent circumstances” required by Section 13(3) had passed. The Fed’s view on this, according to Alvarez, was that if the ring-fenced losses had penetrated through the junior loss-protection layers to the point where the Fed had to lend into the ring-fence, that situation itself would satisfy the “unusual and exigent circumstances” requirement (Alvarez 2022).

Administration1

The FRBNY administered the loan facility (Citi, Treasury, FDIC, and FRBNY 2009a). The Fed worked closely with the Treasury and the FDIC on the Citi ring-fence. On January 15, 2009, Treasury Secretary Paulson wrote a public letter to Fed Chair Bernanke saying that the Treasury fully supported the Fed’s participation in the AGP (Paulson 2009).
The specifics of the loan facility were codified in the Citi Master Agreement contract between Citi and the government, signed on January 15, 2009. The Master Agreement also included addenda that governed executive compensation, corporate governance (see Key Design Decision No. 12, Other Conditions), and assets eligible for the ring-fence (Citi, Treasury, FDIC, and FRBNY 2009a). On November 30, 2009, Citi and the government amended the Master Agreement, making technical revisions and including provisions related to the Making Home Affordable program and other loan modification programs (Citi, Treasury, FDIC, and FRBNY 2009b).
Between November 23, 2008, when the government and Citi announced the support package, and January 15, 2009, when the government and Citi signed the Master Agreement, the government and Citi negotiated on the assets that would comprise the asset pool (SIGTARP 2011).
To activate access to the loan facility, the Treasury and FDIC loss-sharing arrangements must have been exhausted (Fed 2008b). In total, losses on the asset pool would have to reach $56.2 billion^FN for the FRBNY loan facility funding commitment to be triggered (Fed 2010). Eligible losses under the loan facility included charge-offs and realized losses on collection, short-sale losses, foreclosures, and losses through a permitted disposition or exchange but did not include mark-to-market unrealized losses or an increase in related loss reserves (Fed 2009).
To obtain a loan under the loan facility, the FRBNY would require Citi to submit a borrowing request 20 calendar days before funding. After receiving the borrowing request, the FRBNY would have between 20 and 30 business days to provide the proceeds of the loan to Citi (Citi, Treasury, FDIC, and FRBNY 2009a).
In the event that the asset pool incurred losses during a time in which the loan was extended, Citi would be required by the Master Agreement to prepay a principal amount, with accrued interest, on the loan facility equivalent to 10% of that loss value within 30 days after the end of the calendar quarter in which such losses were incurred (Citi, Treasury, FDIC, and FRBNY 2009a).
Citi also would have paid interest on the loan if the loan had been activated. Given that the loan was a one-time loan for the full amount (in other words, there could be no multiple draws), interest would be paid on that total amount. The amount of that loan would be 90% of the remaining Fed-covered asset pool (in other words, the total Fed coverage less the 10% prepayment). Failure of Citi to pay interest on the loan within five days of its coming due would be an event of default under the Master Agreement (Citi, Treasury, FDIC, and FRBNY 2009a). Citi managed all the assets in the asset pool through Citi Financial—Citi’s US consumer finance business subsidiary (Citi 2009a).
The FRBNY contracted two outside vendors, without a competitive bidding process, to perform valuation services in connection with the loan facility: PricewaterhouseCoopers, contracted December 1, 2008, for a fee of $7.8 million; and BlackRock, contracted on December 14, 2008, for a fee if $12.7 million (GAO 2011).

Governance1

Section 129 of the Emergency Economic Stabilization Act of 2008 (EESA), passed on October 3, 2008, required the Fed to report to the Senate Committee on Banking, Housing, and Urban Affairs (Senate Banking Committee) and the House Committee on Financial Services (House Finance Committee) on any use of its Section 13 authority within seven days of invoking that authority (see Key Design Decision No. 6, Communication and Disclosure) (US Congress 2008b, sec. 129[a]).
On January 13, 2011, SIGTARP issued a 77-page audit report entitled “Extraordinary Financial Assistance Provided to Citigroup, Inc.” (SIGTARP 2011). SIGTARP ultimately found that “the Government constructed a plan that not only achieved the primary goal of restoring market confidence in Citigroup, but also carefully controlled the overall risk of Government loss on the asset guarantee” (SIGTARP 2011, 41). Nonetheless, although SIGTARP found that the government parties had effectively avoided financial catastrophe and protected taxpayer funds, it also found that the government’s conclusions with respect to Citi were “strikingly ad hoc” and “undoubtedly” contributed to moral hazard (SIGTARP 2011, 41).
In July 2011, the GAO published a report on the Fed’s emergency programs, including an appendix specifically on the Citi loan facility, and found that the FRBNY did not use a competitive procurement process to award contracts to the private sector entities hired to provide services (see Key Design Decision No. 4, Administration) (GAO 2011).
On November 6, 2009, the COP published its report on US government guarantees during the Global Financial Crisis of 2007–2009. The oversight panel said that government guarantees in general had advantages for taxpayers—such as bearing no up-front price tag and resulting in profits to the government—but that the guarantees resulted in moral hazard and market distortions. The COP said that one possible reason other AGPs were not extended by the government was that the announcements of the two AGPs (for Citi and Bank of America) sufficiently calmed the market. The panel said that “the asymmetric nature” of some of the terms of the Master Agreement protected the government and disadvantaged Citi, lowering the likelihood that the government would have to pay out on the guarantee (COP 2009, 41). The COP also said that the rationale for the Citi AGP remained unclear and that more transparency would have assisted in evaluating and overseeing the program. Citi and Treasury reported to the Oversight Panel “substantial” monitoring and auditing of the asset pool (COP 2009, 40). The Oversight Panel said that it would itself closely monitor the performance of the asset pool (COP 2009).

Communication1

The government aimed to calm markets by communicating a “decisive action” before Asian markets opened on Sunday, Eastern US time (SIGTARP 2011, 19). On a conference call on Thursday, November 20, 2008, FRBNY President Timothy Geithner told Chairman Bernanke, Secretary Paulson, FDIC Chairman Sheila Bair, and OCC Comptroller John Dugan, “We’ve told the world we’re not going to let any of our major institutions fail. We are going to have to make it really clear we’re standing behind Citigroup” (SIGTARP 2011, 13). In an email exchange on November 22, 2008, an email between senior FDIC officials said, “the main point is to let the world know that we will not pull a Lehman,” to which the recipient responded, “At this stage, it is probably appropriate to be clear and direct that the US government will not allow Citi to fail to meet its obligations” (FCIC 2011, 380). Jason Cave, an FDIC official party to the AGP government negotiations, said that the Fed’s participation (via its contingent loan facility) primarily added value through its announcement effect, signaling government unity in standing behind Citi (Cave 2024).
On Sunday, November 23, 2008, the government announced the AGP for Citi. The government said that its actions to support Citi supported its commitment to financial market stability. The government said that it would strengthen the financial system and protect taxpayers and the broader US economy (USG 2008). Regulators thought that the announcement of support to Citi needed to be made over the weekend to support market confidence before the market open on Monday (FCIC 2011).
In Citi’s November 24, 2008, press release announcing the transaction, Citi emphasized the regulatory capital benefit of the Asset Guarantee Program. The headline of the press release was, “Citi Adds $40 Billion of Capital Benefit through Agreement with U.S. Treasury, Federal Reserve, and FDIC” (Citi 2008).^FN
Citi CEO Vikram Pandit said during Citi’s Q4 2008 earnings call that the AGP helped ensure that Citi was well capitalized. He added that Citi viewed it—along with the TIP capital injection—as a bridge to rebuilding tangible common equity, which he said “there are some concerns about” (Citi 2009a). He said that the asset guarantee had helped Citi to reduce its risky assets. Citi made specific reporting on the asset pool available to its investors and the government (Citi 2009a).
Section 129 of the EESA required the Fed to report to the Senate Banking Committee and House Finance Committee on any use of its Section 13(3) authority within seven days of invoking that authority, including its justification for invoking Section 13(3) and the terms of any Fed actions, specifically, “the size and duration of the lending, available information concerning the value of any collateral held with respect to such a loan, the recipient of warrants or any other potential equity in exchange for the loan, and any expected cost to the taxpayers” (US Congress 2008b, sec. 129[a][2]). Pursuant to its Section 129 reporting requirements, the Fed issued a Section 129 report on its loan facility on November 23, 2008. In its Section 129 Disclosure, the Fed said that the AGP—of which its loan facility was part—would “help restore confidence” in Citi and would “promote financial stability” (Fed 2008b, 2). The Fed also said that it did not expect its loan facility to result in any losses to the Fed or the taxpayer and presented other disclosures required by Section 129 (subsection [a][2]) (Fed 2008b).
On January 15, 2009, the day on which Citi and the government signed a Master Agreement defining terms of the AGP, Secretary Paulson wrote a public letter to Chairman Bernanke saying that the Treasury understood that the FRBNY’s participation was necessary, that the Treasury fully supported the Fed’s actions, and that the Treasury acknowledged that it could receive lowered remittances from the Fed to the Treasury’s general fund as a result of possible losses on the facility (Paulson 2009).
The Fed discussed the loan facility, the motivation for the AGP, the timing of the interventions, and the outcomes of the interventions in its 2008 annual report. In that report, the Fed said that the FRBNY loan commitment’s probable loss and fair value were both zero because it was unlikely that the FRBNY would have to make the loan (Fed 2009). Citi also disclosed the loan facility in its 2008 annual report (Citi 2009b). The Fed described the loan facility termination in its 2009 annual report (Fed 2010). Citi also disclosed the termination of the loan facility in its 2009 annual report (Citi 2010).
COP member Damon Silvers said that Citi did not disclose to the COP a comprehensive and itemized list of assets under the asset pool, thereby rendering the COP unable to independently value the Citi ring-fence (COP 2009).

Source and Size of Funding1

According to the original term sheet, the size of the overall asset pool subject to the ring-fence arrangement was $306 billion (Fed 2008a). Then–Citi Vice Chairman Kelly told the FCIC that “there was not a huge amount of science in coming to that [$306 billion] number” and that the figure had been chosen by regulators to “give the market comfort that the catastrophic risk has been taken off the table” (FCIC 2011, 381). When Citi and the government signed the Master Agreement for the AGP in January 2009, the final agreed size of the asset pool was capped at $300.8 billion (Citi, Treasury, FDIC, and FRBNY 2009a). In its 2008 annual report, the Fed reported its share as a contractually committed amount of $244.8 billion (Fed 2009). The Fed likely would have funded this liquidity provision through the creation of new reserves.
In the event total losses surpassed the $56.2 billion threshold, the FRBNY agreed to make a loan equal to:
(a) the sum of the Adjusted Baseline Values of all Covered Assets as of the end of the most recently completed Calendar Quarter prior to the FRBNY Funding Date less (b) the principal amount of the FRBNY Loan that would otherwise be subject to immediate prepayment by Citigroup pursuant to Section 4.7(a), which amount (b) shall be calculated as 10% of the excess of (i) the Citigroup Quarterly Net Loss corresponding to the Covered Loss giving rise to the funding of the FRBNY Loan over (ii) the dollar amount equal to (A) the amount of such Covered Loss funded by any Treasury Advance and/or FDIC Advance divided by (B) 0.90. (Citi, Treasury, FDIC, and FRBNY 2009a, 7–8)
Figure 5 shows the mechanics of the $56.2 billion threshold for the Fed’s lending obligation.
Figure 5: Citigroup AGP Loss-Sharing Structure
Source: GAO 2011.
Section 4.7(a) of the Master Agreement said that, if Citi incurred a covered loss in the same quarter that a loan under the loan facility was outstanding, Citi would be required to prepay the loan in an amount equal to 10% of that loss, along with any interest therein associated (Citi, Treasury, FDIC, and FRBNY 2009a). As a result, the total value of the loan would be $220.4 billion (90% of the Fed’s lending commitment) (see Figure 6).
More specifically, the Fed was obligated to lend Citi $244.6 billion^FN in the event that the portfolio lost $56.2 billion, exhausting the Citi layer ($39.5 billion) and the $16.7 billion layer split 90% to the FDIC and Treasury and 10% to Citi (GAO 2011).^FN
Under the November 23, 2008, announcement, Citi’s first-loss was originally $29 billion “plus reserves”; in the eventual Master Agreement, signed on January 15, 2009, that figure was $39.5 billion, which was equivalent to the $29 billion plus $9.5 billion of asset pool reserves, plus an additional $1 billion in reserves agreed to in connection with hedging products (Citi, Treasury, FDIC, and FRBNY 2009a; COP 2009; Fed 2008b). Figure 6 shows the government’s ultimate loss-sharing positions and the FRBNY’s contingent loan commitment.
Figure 6: Loss-Sharing Positions, Citi AGP
Source: SIGTARP 2011.

Rates and Fees1

The Fed charged a floating rate of the three-month Overnight Index Swap (OIS) rate plus 300 basis points (bps) on the loan (which would be equal in size to 90% of the remaining assets in the asset pool) (Citi, Treasury, FDIC, and FRBNY 2009a).
The OIS rate is a market-determined rate representing expectations for the Fed’s policy rate over different tenors; in this case, three months. At the time, the Fed’s “Regulation A”—regulations written by the Fed to guide its implementation of Section 13(3), among other statutes—called for Fed emergency credit to carry an interest rate “above the highest rate in effect for advances to depository institutions,” a reference to the Fed’s discount window (Fed 2008c, vol. Code of Federal Regulations, title 12, sec. 201.4). At the time, the discount window’s primary credit was 25 bps above the upper limit of the Fed’s policy rate target range, for a sum total of 50 bps; the rarely used “secondary credit” charged the primary credit rate plus 50 bps (100 bps total) (Fed 2008e). According to the Congressional Oversight Panel, the interest rate was “standard and within commercial limits” (COP 2009, 41).
For any amounts overdue, the interest rate would be the “default rate”—the normal interest rate (OIS 300 bps) plus an additional 200 bps (Citi, Treasury, FDIC, and FRBNY 2009a).
Upon termination of the Master Agreement on December 23, 2009, Citi paid the FRBNY a $50 million termination fee and agreed to reimburse the FRBNY for its out-of-pocket expenses associated with administering the loan facility (Citi, Treasury, FDIC, and FRBNY 2009c; Fed 2010).

Loan Duration1

The loan would be a term loan, with final payments due no later than November 20, 2018. No amounts repaid or prepaid could be reborrowed by Citi (Citi, Treasury, FDIC, and FRBNY 2009a). Citi could voluntarily prepay the loan without penalty (Citi, Treasury, FDIC, and FRBNY 2009a).
Citi would be required by the Master Agreement to repay all debts (inclusive of interest) on any loan under the loan facility in two payments. The Master Agreement required Citi to pay the “Installment Balance” by November 20, 2013—a five-year maturity—and the remaining balance of the loan by November 20, 2018—a 10-year maturity—which the FRBNY could extend unilaterally by one year. The Installment Balance would be equal to the share of the available amount (see Key Design Decision No. 7, Source and Size of Funding) represented by nonresidential assets, less Citi’s 10% loss sharing value, less 90% of proceeds earned on any asset in the asset pool (Citi, Treasury, FDIC, and FRBNY 2009a).
From November 21, 2008, through December 31, 2008, Citi took $900 million in losses on the asset pool (Citi 2009b). As of June 30, 2009, Citi had announced a cumulative $5.3 billion in losses on the asset pool (COP 2009). On December 13, 2009, Citi informed the Fed that it intended to terminate the Master Agreement. The next day, the Fed granted approval for the Citi-proposed termination, subject to the condition that Citi issue common stock and other securities and repay its TIP capital.^FN On December 22, 2009, Citi raised equity and obtained the Treasury’s approval to repay its TIP investment, allowing Citi to exit the AGP.^FN The following day, Citi and the government terminated the Master Agreement,^FN thereby terminating the FRBNY’s loan facility (Citi, Treasury, FDIC, and FRBNY 2009c).^FN

Balance Sheet Protection1

The FRBNY never expected to lend through the loan facility. For the Fed’s loan facility to be triggered, losses on the asset pool would have had to exceed $56.2 billion, but even in the highest-stress modeled scenario, the government expected that losses would not exceed $43.9 billion (ultimately, the government put expected losses at $37 billion). Later, in May 2009, BlackRock estimated a base-case scenario of $32.7 billion in losses and a stress scenario of $50.8 billion (SIGTARP 2011). Ultimately, Citi’s losses on the asset pool were just $10.2 billion (SIGTARP 2012).
While ultimately Citi and the government agreed to decrease the size of the asset pool by $6.5 billion, it was not a symmetric reduction: they reduced corporate securities, loans, and lending commitments by $47.3 billion, while increasing consumer loans and lending commitments by $40.8 billion (SIGTARP 2011). The ultimate asset pool consisted mainly of residential and commercial mortgage-backed securities and loans (FCIC 2011).
To be eligible for inclusion in the asset pool, the assets had to satisfy the following criteria:
Be included on the balance sheet of a Citi affiliate by November 21, 2008;
Not be a foreign asset;
Not be an equity or derivative asset;
Be issued or originated before March 14, 2008;
Not have Citi as an obligor; and
Not be guaranteed by the government under another agreement.
Eventually, Citi replaced $2.3 billion of assets that the government rejected for inclusion in the asset pool (SIGTARP 2011).
Figure 7 shows the exclusions and substitutions made to the asset pool before it was finalized.
Figure 7: Citi Asset Pool, Exclusions and Substitutions for Finalization
Source: SIGTARP 2011.
If covered losses on the asset pool exceeded $27 billion, the government had the right to change the asset manager of the asset pool (Citi 2009b). The loan facility’s principal balance was nonrecourse; however, the Fed retained recourse to Citi for the interest and to the 10% loss-sharing prepayment amount owed by Citi in the event of a drawdown on the loan facility (Fed 2008b; Fed 2009).
The FRBNY would have exclusive, first-priority perfected security interests in each covered asset, which Citi would pledge as collateral for the Loan (Citi, Treasury, FDIC, and FRBNY 2009a).
When Citi reported its gains and losses on the asset pool to the Treasury (see Key Design Decision No. 12, Other Conditions), Citi would be required to remit a certain share of any gains to the government (COP 2009). In the event that either the FRBNY or Citi made gains on covered assets during the period the loan was extended, Citi would be required to pay 90% of those gains toward the principal of the loan, thereby reducing its size. In the event that Citi failed to use gains or recoveries on covered assets to repay the principal on the loan as stipulated in Section 7 of the Master Agreement, it would be an event of default (Citi, Treasury, FDIC, and FRBNY 2009a). As assets in the asset pool amortized or were sold, the overall size of the asset pool—and thereby the Fed’s contingent lending obligation—would diminish over time (COP 2009).
Any loans through the loan facility would be made with only partial recourse to Citi for principal—to the extent that Citi had an ongoing 10% loss-sharing arrangement with the Fed—but would be made with recourse to interest payments (Fed 2008b). Full-recourse lending is standard practice for the Fed’s discount window, though some of its Section 13(3) lending has been done on a nonrecourse basis (Fed 2021; Kelly 2023).

Impact on Monetary Policy Transmission1

Other Conditions1

As conditions of the overall AGP, the government required Citi to report on a quarterly basis: (a) the adjusted baseline value of each asset; (b) aggregate losses incurred on the asset pool by asset class; and (c) aggregate gains or losses on the asset pool. The government also required Citi to produce monthly reports to the Treasury including updates on the value of assets (reported as fair value, not mark-to-market) in the asset pool, the monthly changes of the asset values, the year-to-date changes in the value of those assets, the main determinants of the changes in those values, and Citi’s forecasted lifetime losses or gains on those assets based on Citi’s stress testing (COP 2009).
As part of the AGP broadly (inclusive of the loan facility), Citi was required by the Master Agreement to abide by numerous conditions regarding, inter alia, asset management, corporate management, executive compensation, and dividend payments (capped at one cent per share of common stock). Additionally, the Treasury TARP capital injections (see Key Design Decision No. 2, Part of a Package) came with their own conditions, including compliance with executive compensation and foreclosure-mitigation policies (Fed 2008b). On November 30, 2009, Citi and the government revised the Executive Compensation Guidelines associated with the Master Agreement and backdated that revision to July 23, 2009 (Citi, Treasury, FDIC, and FRBNY 2009a; Citi, Treasury, FDIC, and FRBNY 2009b). Figure 8 shows the Governance and Asset Management Guidelines, Exhibit B to the Master Agreement.
Figure 8: Master Agreement, Governance and Asset Management Guidelines
Source: SIGTARP 2011.
As a condition for granting approval for the termination of the AGP Master Agreement, the Fed required that Citi issue common stock and other securities. Eight days after the Fed granted its conditional approval, Citi issued common stock and mandatory convertible preferred stock, consistent with the Fed’s stipulated conditions (Citi, Treasury, FDIC, and FRBNY 2009c).

Key Program Documents

(Citi, Treasury, FDIC, and FRBNY 2009a) Citigroup Inc., US Department of the Treasury, Federal Deposit Insurance Corporation, and Federal Reserve Bank of New York (Citi, Treasury, FDIC, and FRBNY). 2009a. “Citigroup Master Agreement.” January 15, 2009.
Agreement covering the terms of Citi’s Asset Guarantee Program.
(Citi, Treasury, FDIC, and FRBNY 2009b) Citi, Treasury, FDIC, and FRBNY. 2009b. “Amendment to Citigroup Master Agreement.” November 30, 2009.
Legal agreement revising the Citi Asset Guarantee Program.
(Citi, Treasury, FDIC, and FRBNY 2009c) Citi, Treasury, FDIC, and FRBNY. 2009c. “Citigroup Termination Agreement.” December 23, 2009.
Agreement covering the termination of Citi’s Asset Guarantee Program.
(Fed 2008a) Board of Governors of the Federal Reserve System (Fed). 2008a. “Summary of Terms: Eligible Asset Guarantee.” November 23, 2008.
Document describing the preliminary terms of Citi’s Asset Guarantee Program.
(Fed 2008b) Board of Governors of the Federal Reserve System (Fed). 2008b. “Authorization to Provide Residual Financing to Citigroup, Inc. for a Designated Asset Pool.” December 1, 2008.
Report explaining the Federal Reserve’s decision to grant Citi financing for its ring-fenced asset pool.
(Krimminger, Murton, and Thomas 2008) Krimminger, Michael H., Arthur J. Murton, and John V. Thomas. 2008. “FDIC Krimminger, Thomas, Murton Email Chain RE Proposed Conduit.” Email correspondence, November 22, 2008.
Email chain among FDIC leadership debating different approaches to open-bank assistance for Citi.

Key Program Documents

(Fed 2008c) Board of Governors of the Federal Reserve System (Fed). 2008c. “Extension of Credit by Federal Reserve Banks.” Code of Federal Regulations, title 12 (January 1, 2008): 5–14.
The Fed’s Regulation A, regulating its ability to lend at a non-penalty rate.
(US Congress 2008a) US Congress. 2008a. Federal Reserve Act (FRA). 12 U.S.C. Ch. 3 (January 8, 2008).
Law authorizing the powers of the Federal Reserve.
(US Congress 2008b) US Congress. 2008b. Emergency Economic Stabilization Act of 2008 (EESA). Public Law 110-343, 122 Stat. 3765 (October 3, 2008).
Act authorizing TARP and various terms and conditions for TARP programs.

Key Program Documents

(Citi 2008) Citigroup, Inc. (Citi). 2008. “Citi Adds $40 Billion of Capital Benefit through Agreement with U.S. Treasury, Federal Reserve, and FDIC.” Press release, November 24, 2008.
Press release describing the Asset Guarantee Program’s effect on Citi’s regulatory capital levels.
(Citi 2009a) Citigroup, Inc. (Citi). 2009a. “Citigroup Q4 2008 Earnings Call Transcript.” January 16, 2009.
Call transcript describing Citi’s loss reserving for the ring-fenced asset pool.
(Moody’s 2008) Moody’s Investors Service (Moody’s). 2008. “Moody’s Continues to Review Citigroup for Possible Downgrade Following Government Action.” Press release, November 24, 2008.
Moody’s press release announcing its continued review of Citi after the AGP.
(USG 2008) “Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup.” Joint press release, November 23, 2008.
Press release announcing the asset guarantee and capital support for Citi.

Key Program Documents

(BIS 2004) Bank for International Settlements (BIS). 2004. “International Convergence of Capital Measurement and Capital Standards: A Revised Framework.” June 2004.
BIS capital standards framework explaining the risk-weighting regime for corporate credit.
(Brookings and YPFS 2018) Brookings Hutchins Center on Fiscal & Monetary Policy, and Yale Program on Financial Stability (Brookings and YPFS). 2018. “Charting the Financial Crisis: U.S. Strategy and Outcomes.” September 11, 2018.
Report showing a diagram on Citi’s asset ring-fence.
(Citi 2009b) Citigroup, Inc. (Citi). 2009b. Annual Report 2008.
Annual report discussing major events for Citi in 2008.
(Citi 2010) Citigroup, Inc. (Citi). 2010. Annual Report 2009.
Annual report discussing major events for Citi in 2009.
(COP 2009) Congressional Oversight Panel (COP). 2009. “November Oversight Report: Guarantees and Contingent Payments in TARP and Related Programs.” November 6, 2009.
Report describing oversight and reporting requirements for Citi’s Asset Guarantee Program.
(Crepaz 2008) Crepaz, Andrea. 2008. “The US Does Not Allow Citi to Sink.” UniCredit, November 24, 2008.
UniCredit analyst report analyzing the Citi Asset Guarantee Program.
(FCIC 2011) Financial Crisis Inquiry Commission (FCIC). 2011. “The Financial Crisis Inquiry Report.” Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011.
Report investigating the 2008 financial crisis and emergency programs implemented in response.
(Fed 2008d) Board of Governors of the Federal Reserve System (Fed). 2008d. “Minutes of Board Meetings, July 13 to December 16, 2008.” July 13, 2008.
Minutes describing the Fed Board’s meetings from part of 2008.
(Fed 2008e) Board of Governors of the Federal Reserve System (Fed). 2008e. “Federal Reserve Discount Window: General Information.” September 19, 2008.
Website providing the Fed’s policy, primary credit, and secondary credit rates.
(Fed 2009) Board of Governors of the Federal Reserve System (Fed). 2009. Annual Report 2008.
Annual report mentioning the support package extended to Citi.
(Fed 2010) Board of Governors of the Federal Reserve System (Fed). 2010. Annual Report 2009.
Annual report of the Federal Reserve for 2009.
(Fed 2020) Board of Governors of the Federal Reserve System (Fed). 2020. “Primary Dealer Credit Facility (PDCF).” March 18, 2020.
Federal Reserve data showing PDCF usage over time.
(Fed 2021) Board of Governors of the Federal Reserve System (Fed). 2021. “Credit and Liquidity Programs and the Balance Sheet.” May 13, 2021.
Website describing the Fed’s recourse policy for discount window lending during the Global Financial Crisis.
(FRBNY 2009) Federal Reserve Bank of New York (FRBNY). 2009. “FRBNY Summary of Supervisory Activity and Findings on Citi.” January 14, 2009.
Supervisory assessment discussing Citi’s financing position.
(GAO 2011) Government Accountability Office (GAO). 2011. “Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance.” Report to Congress No. GAO-11-696, July 2011.
Report describing the Fed’s handling of the Citi Asset Guarantee Program.
(Geithner 2014) Geithner, Timothy. 2014. Stress Test: Reflections on Financial Crises. New York: Crown Publishing Group.
Former FRBNY President and US Treasury Secretary Geithner’s memoir of his time in government.
(Graseck and Pate 2008) Graseck, Betsy, and Cheryl Pate. 2008. “Citigroup Inc.: Fed Action a Strong Positive; Less Loss and Dilution Risk.” Morgan Stanley Research, November 24, 2008.
Morgan Stanley analyst report describing the analysts’ views on the Citigroup Asset Guarantee Program.
(Juneja, Sun, and Curcuruto 2008) Juneja, Vivek, Jeanne Sun, and Thomas Curcuruto. 2008. “Citigroup, Inc.: Gov’t Rescue: Equity Moderate, Fixed Income Positive.” J.P. Morgan Research, November 25, 2008.
J.P. Morgan analyst report describing analysts’ views on the Citigroup Asset Guarantee Program.
(Kelly 2023) Kelly, Steven. 2023. “Why Does the Fed Really Use SPVs?” Yale School of Management, October 5, 2023.
Research note discussing some of the Fed’s authorities under Section 13(3).
(Mayo and Spahr 2008) Mayo, Mike, and Chris Spahr. 2008. “New Government Program; Lowering Ests.” Deutsche Bank Research, November 24, 2008.
Deutsche Bank research note highlighting continued concerns about Citi despite the Asset Guarantee Program.
(Paulson 2009) Paulson, Henry M., Jr. 2009. Letter from Hank Paulson to Ben Bernanke about Citigroup Ring-Fence Funding, January 15, 2009.
Letter from Secretary Paulson to Chairman Bernanke regarding the Fed’s contingent financing position for Citigroup.
(Richardson et al., 2008) Richardson, Mark D., Christopher J. Spoth, Sheila C. Bair, and Jason C. Cave. 2008. “FDIC Richardson Email RE 11-21-08 Citi Liquidity Call Notes.” Email correspondence, November 21, 2008.
Email chain describing Citi’s liquidity challenges.
(SIGTARP 2011) Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). 2011. “Extraordinary Financial Assistance Provided to Citigroup, Inc.” SIGTARP 11-002, January 13, 2011.
Report covering the emergency support provided to Citi.
(SIGTARP 2012) Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). 2012. “Quarterly Report to Congress.” January 26, 2012.
SIGTARP report describing Citi’s eventual losses on the ring-fenced assets.
(Wigand and Held 2008) Wigand, James, and Herbert Held. 2008. “Memorandum to the Board of Directors of the FDIC Regarding Citigroup,” November 23, 2008.
Report describing the potential impacts of a Citi failure.

Key Program Documents

(Alvarez 2022) Alvarez, Scott G. 2022. “Lessons Learned Interview by Steven Kelly, April 14, 2022.” Transcript. Yale Program on Financial Stability Lessons Learned Oral History Project.
YPFS interview with former Federal Reserve General Counsel Scott Alvarez describing the legal authorities framing the Fed’s response to the Global Financial Crisis.
(Cave 2024) Cave, Jason. 2024. “Lessons Learned Interview by Greg Feldberg and Vincient Arnold.” Transcript. Yale Program on Financial Stability Lessons Learned Oral History Project.
YPFS interview with former FDIC official Jason Cave regarding asset guarantee programs.
(Davison 2019) Davison, Lee. 2019. “The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception.” Journal of Financial Crises 1, no. 2: 1–39.
Paper examining the systemic risk exception allowance for the FDIC’s Temporary Liquidity Guarantee Program.
(FDIC 2018) “Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis.” In Crisis and Response: An FDIC History, 2008–2013, 67–98. Washington, DC: FDIC.
Book chapter by the FDIC covering the use of systemic risk exceptions in the financial crisis.
(Hoffner and Arnold 2024) Hoffner, Benjamin, and Vincient Arnold. 2024. “United States: Citigroup Capital Injection, 2008.” Journal of Financial Crises 6, no. 3: 530–58.
YPFS case study examining the Targeted Investment Program capital injection for Citigroup.
(Kelly et al., forthcoming) Kelly, Steven, Vincient Arnold, Greg Feldberg, and Andrew Metrick. Forthcoming. “Survey of Ad Hoc Emergency Liquidity Programs." Journal of Financial Crises.
Survey of YPFS case studies examining the provision of ad hoc emergency liquidity assistance.
(Lowenstein 2010) Lowenstein, Roger. 2010. The End of Wall Street. New York: Penguin Publishing Group.
Book describing the financial crisis and Citi’s failed bid for Wachovia.
(Vergara 2022) Vergara, Ezekiel. 2022. “United States: Transaction Account Guarantee Program.” Journal of Financial Crises 4, no. 2: 673–93.
YPFS case study examining the FDIC’s Transaction Account Guarantee Program.
(Wiggins et al. 2022) Wiggins, Rosalind Z., Sean Fulmer, Greg Feldberg, and Andrew Metrick. “Broad-Based Emergency Liquidity Programs.” Journal of Financial Crises 4, no. 2: 86–178.
Survey of YPFS case studies examining broad-based emergency liquidity programs.

Citi’s Proposed Acquisition of Wachovia

After depositors had withdrawn billions ($17 billion in 10 weeks) from Wachovia, its executives feared that a collapse was imminent. At the time, Citigroup was the primary candidate for a rescue acquisition. On Friday, September 26, 2008, Citi executives concluded that they could not acquire Wachovia without government help (Lowenstein 2010).

During the weekend of September 27–28, 2008, the Federal Reserve argued^FN that Wachovia should be rescued in some way, with Federal Deposit Insurance Corporation (FDIC) assistance if necessary. Two banks were engaged in bids for the acquisition of Wachovia—Wells Fargo and Citi. In order to support its proposed acquisition, Citi requested that the FDIC cover losses on a pool of $312 billion of assets that Citi could select, with Citi being responsible for the first $30 billion in losses plus $4 billion of losses per year for three years; the FDIC would then be responsible for losses above the first $42 billion (FCIC 2011; Lowenstein 2010). The FDIC expected losses on the proposed asset pool to be between $35 billion and $52 billion. In the FDIC’s analysis, it had zero expected costs for the Citi proposal. In exchange for the loss protection, Citi would issue the FDIC $12 billion in preferred stock and warrants. The US Department of the Treasury agreed to an arrangement where it would fund all FDIC losses under the loss-sharing transaction via a line of credit^FN—which would ultimately be repaid by FDIC assessments on the banking industry (FCIC 2011; FDIC 2018). Figure 9 shows the loss layers and FDIC loss forecasts for the proposed Citi-Wachovia ring-fencing arrangement.

Figure 9: FDIC, Treasury, Citi, Wachovia Ring-Fencing Arrangement

FDIC, Treasury, Citi, Wachovia Ring-Fencing Arrangement Sources: FCIC 2011; FDIC 2018; author’s analysis.

Some Wachovia executives suspected that the ring-fencing arrangement was an attempt to provide assistance to Citi without drawing public attention because the guaranteed assets could include assets in Citi’s existing portfolio (since Citi could select the ring-fenced portfolio), in addition to those it would acquire from Wachovia (Lowenstein 2010). According to journalist Roger Lowenstein, then–Citi CEO Vikram Pandit’s “grandest scheme for engineering a recovery was to buy Wachovia” (Lowenstein 2010, 251). According to Lowenstein, “Citi envisioned running its retail business out of Wachovia’s superior retail franchise, which would come gift-wrapped in a government guarantee, and would also provide cover for Citigroup’s loans” (Lowenstein 2010, 251).

Ultimately, though, Citi would not acquire Wachovia. Despite Wachovia’s having signed an exclusive agreement with Citi and the FDIC that prohibited it from negotiating with other parties, a more competitive offer from Wells Fargo, with no government assistance at all (and not requiring the invocation of the systemic risk exception), won over Wachovia. With the FDIC’s approval, on Thursday, October 2, Wachovia’s board voted unanimously in favor of the Wells Fargo offer (FCIC 2011). Citi’s stock fell 18% on the news that its acquisition had been called off (Geithner 2014). On the news, Citi CEO Pandit called then–FDIC Chair Sheila Bair and said, “Sheila, you know this isn’t just about Wachovia. There are other issues at stake,” which Lowenstein said was a reference to Citi’s own exposure (Lowenstein 2010). The deal closed on December 31, 2008 (FCIC 2011). Timothy Geithner, president of the Federal Reserve Bank of New York at the time, later said that because of Citi’s failed bid to acquire Wachovia, markets had assumed that Citi needed Wachovia’s domestic deposits to survive (Geithner 2014).

Taxonomy

Intervention Categories:

Ad-Hoc Emergency Liquidity

Countries and Regions:

United States

Crises:

Global Financial Crisis

United States: Citigroup Emergency Liquidity Program, 2008

Purpose

Key Terms

Abstract

Context

At a Glance

Summary Evaluation

Key Design Decisions

Purpose1

The Fed created the loan facility to facilitate the Treasury’s Asset Guarantee Program—a loss-sharing arrangement for Citi—and thereby restore confidence in Citi and support financial stability.

Part of a Package1

The Fed loan facility facilitated the Asset Guarantee Program and was part of a package for Citi that also included a capital injection from the Treasury.

Legal Authority1

Section 13(3) of the Federal Reserve Act provided the legal authority for the Fed to create and lend through the loan facility.

Administration1

The FRBNY administered the loan facility in accordance with the Master Agreement.

Governance1

SIGTARP and GAO completed audits of the government’s support package to Citi. The COP published a report on US government guarantees, which covered the Citi loan facility. The Fed was accountable to Congress in reporting its lending activities.

Communication1

Citi and the Fed disclosed the loan facility in press releases and annual reports; the government targeted the assistance communications to calm markets before markets opened after the weekend.

Source and Size of Funding1

The FRBNY agreed to lend against the value of the remaining assets in the asset pool after Citi, the Treasury, and the FDIC had absorbed $56.2 billion of losses.

Rates and Fees1

Once Citi drew on the loan facility, the Fed would charge the OIS rate plus 300 basis points.

Loan Duration1

The loan facility would be available to Citi for the duration of the government’s asset guarantee—that is, five or 10 years, depending on each of the underlying assets. Citi exited the ring-fencing arrangement on December 23, 2009.

Balance Sheet Protection1

Impact on Monetary Policy Transmission1

Our research did not uncover any specific impact of the loan facility on monetary policy transmission.

Other Conditions1

Although the Fed loan facility did not itself specifically impose conditionality, the broader Asset Guarantee Program included numerous conditions on reporting, corporate management, asset management, executive compensation, and dividend payments.

Key Program Documents

Implementation Documents6

Key Program Documents

Legal/Regulatory Guidance3

Key Program Documents

Media Stories1

Key Program Documents

Press Releases/Announcements4

Key Program Documents

Reports/Assessments25

Key Program Documents

Key Academic Papers9

Appendices

Taxonomy

Intervention Categories:

Countries and Regions:

Crises: