Nov. 24: Size has saved Citi and Vikram Pandit’s job, at least for the time being.

The US government has agreed to bail out the stricken Citigroup by shouldering most of the potential losses on $306 billion of high-risk assets and injecting $20 billion of new capital.

The US package, sealed after tense talks that stretched close to Sunday midnight, mounts the biggest move in history to rescue a bank more deeply intertwined with the global financial system than nearly any other.

Critics frowned on another massive government intervention in the financial system but this time, the company in jeopardy is truly gigantic.

Citigroup, which has the farthest international reach of any US bank with operations in more than 100 countries, is widely perceived to be too big to be allowed to fail because any collapse can cause financial havoc around the globe.

Responsible for some of the banking industry’s most popular innovations, the bank was a pioneer in the development of ATMs and is known for the tagline “Citi never sleeps”.

In return for the government bailout, Citigroup’s dividend will be effectively wiped out. The bank cannot pay out more than a penny (1 cent) per share per quarter over the next three years without government consent. The quarterly dividend is now 16 cents.

In contrast to other US company bailouts, India-born chief executive Pandit and other top managers were not asked to resign, though the government will have the final say on compensation.

Pandit, who has been chief executive for less than a year, inherited a difficult challenge and has made only limited progress in stabilising Citi by slashing staff and expenses. The steep drop in the stock price last week reflected doubts among investors about whether Pandit can turn Citi around and make it eventually profitable.

Pandit today welcomed the government action. “We appreciate the tremendous effort by the government to assure market stability,” he said in a statement.

US regulators hope the dramatic action will bolster badly shaken confidence in the once mighty banking giant as well as America’s financial system, a goal that so far has been elusive despite a flurry of government interventions to battle the worst global crisis since the 1930s. Shares of Citi surged 55 per cent to $5.83 in electronic trading before the opening bell in New York. European shares also rose.

Under the deal, Citigroup will absorb the first $29 billion in any further losses on the high-risk assets totalling $306 billion, which are primarily securities backed by mortgages and commercial real estate loans, with the government stepping in to cover most of the losses beyond that amount.

The US government in return is to receive up to $7 billion in preferred shares.

The treasury will invest another $20 billion in Citigroup on top of the $25 billion of taxpayer dollars already invested in the bank. In exchange, the government will get even more preferred shares.

The stock of the group, once the world’s largest bank by market value at $250 billion, has dived so much that on Friday its worth was just $20.5 billion, making it smaller than each of Canada’s top three banks.

Not all investors welcomed the package. “You’re seeing an inept management team being rewarded by the US government,” said William Smith, chief executive of Smith Asset Management in New York, which owns Citi stock.