Terms on the rescue was questioned rather than the issue

US officials were questioning the terms of the rescue of Citigroup. Government officials believed that Citi was a company too big to fail. Now though is a time when the finance was too vulnerable to face much major shock but the economy is heading for contraction and the stock markets are in sharp decline.

A source said that the Federal Reserve, US Treasury and Federal Deposit Insurance Corp realized these considerations therefore leading to taking on the risk of losses on about $306 billion of Citi’s risky assets.

Citigroup was especially hit by the downturn.

Failure in buying Wachovia weeks before made the bank exposed itself.  The failed deal was a change to make Citi strengthen its critical areas like the commercial banking operation and the deposit base.

The New York company’s weaknesses were evident to the markets when Wells Fargo beat them in buying Wachovia. Last week, pressure on Citi’s stock price moved up as questions on their management and business model heightened.

Bank’s call for help

Citi was not performing well in this bad market and when the stocks dropped on Wednesday and Thursday, a run on the institution seemed developing. Then the bank asked for the government’s help.

Over the weekend, a discussion was done among Citi, officials from the Treasury Market and Federal Reserve and bank regulators.

By Saturday, government officials decided they need to rescue Citi but had to agree on what terms. A generic statement of support would fail the laugh test, but a heavy-handed intervention, as was done with bailout of American International Group, was also unattractive.

Terms of any financial bailout would have to find a balance between too generous and harshly punitive.

The Citi rescue, which provided the bank with a backstop for what it saw as a critical segment of distressed assets, was just one of the latest government efforts to restore some calm to markets.