citibank

The U.S. government and Citigroup are working feverishly to hammer out a rescue plan for the beleaguered bank. If all goes according to plan, there will likely be an announcement of some type of plan in a couple of hours.
The exact nature of plan remains unclear, but the government is leaning towards some sort of cash infusion into Citigroup

The plan will probably be a multi-layered one, which means the government could backstop losses on Citigroup's troubled assets as well. In exchange, Citi may issue preferred stock to the government

Sources with knowledge of the negotiations say "everything is on the table", meaning that even the government plan of buying the troubled assets could be revived.

he problem with buying the assets from Citi is political: People close to the deal know that other firms will line up and ask the government to purchase their troubled assets as well. Brokerage stocks got crushed when Treasury Secretary Hank Paulson reversed his plan on the TARP to direct capital infusions to the banks and away from buying troubled assets.

The Bottom line: This is very fluid and the situation may change again. But as of now, the government is getting cold feet on plan to buy troubled assets, which leaves direct capital infusion on the table.

Negotiating A Deal

The government is mulling the purchase of a substantial amount of assets from Citi, similar to a good bank, bad bank structure. The government would absorb much of the losses for Citi if there are losses and Citi would issue preferred stock to the government.

While the Fed could buy more than $100 billion or more in the bad assets if the plan goes through, that doesn't mean it will pay Citi $100 billion, depending on the final valuation of those assets. According to people with knowledge of the discussions, the plan for Citi resembles the original TARP proposal, in which the government would buy bad assets for financial firms at some price higher than what's being offered in the market.

People close to the matter underscore that none of this is a done deal: Other deals, such as the Lehman Brother Good bank / Bad bank proposal blew up at the last minute. Citigroup had no immediate comment. CNBC is still waiting on comment from the Treasury and Federal Reserve.

Reports from Washington say the White House is unaware of any government talks with Citigroup. It also declined comment on whether President Bush would back a government rescue of Citigroup.

Citi officials are reportedly working on a plan that could include a capital injection from the Federal government—among other possible ideas. The details have yet to be hammered out and it's not clear when such a plan would be announced.

No Plans For Federal Takeover Of Citi

As of Saturday afternoon, the general consensus between officials from Citi and government officials from the US Treasury department and US Federal Reserve is that the government will not takeover Citigroup in the way it took control of AIG [AIG 1.60 0.16 (+11.11%) ] — by lending the firm massive amounts of money and in return assuming a huge equity position.

Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup's balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.

Still, officials from the Treasury and Citigroup are unsure what it would take to restore confidence in the company, including a possible smaller capital injection or some sort of statement that Citigroup is financially sound.

For that reason, Citigroup officials are continuing to explore possible merger possibilities and a spin off of some of Citigroup's businesses, even as SEP Vikram Pundit publicly stated the sale of the firm's massive and coveted broker business, Smith Barney is off the table, these people say.