Early yesterday morning America's incoming Treasury Secretary signed off on a deal that redefined the Government's role in the future of the country's banking industry.

Tim Geithner, president of the New York Federal Reserve, who was confirmed as Barack Obama's top Treasury official yesterday, agreed a state rescue of Citigroup that effectively neuters the bank's own management and puts him in control of its $2 trillion of assets.

The transfer of power from Citigroup's Park Lane headquarters in Manhattan down the coast to 1500 Pennsylvania Avenue in Washington was made overnight after the US Government agreed to inject $20 billion into the bank and absorb the bulk of losses that arise from $306 billion of its most toxic assets. The decision to rescue Citigroup came after a frantic week of talks between Vikram Pandit, the bank's chief executive, and federal officials in Washington.

Over the past fortnight Wall Street rapidly lost confidence in Citigroup. Its shares plunged 60 per cent amid fears that the bank had insufficent capital to cope with ever-deteriorating credit conditions. Mr Pandit, who had been appointed chief executive less than a year ago, had tried to convince himself, the board and the staff that all was well, right up until the end of last week.

On Friday he hosted a conference call for Citigroup staff and told them that the bank was healthy, its franchise was second to none and that, critically, there was plenty of cash to weather the worst storm on Wall Street since the Great Depression. Mr Pandit did not quite believe his own sales pitch and neither did his employees. By Friday afternoon, bankers at Citigroup were joking that Somali pirates were offering one cent a share if the staff agreed to wear eyepatches.

Privately, Mr Pandit hoped that Washington would make some kind of statement to the markets, expressing the Government's confidence in the bank. But no such expression was made. The tipping point came on Friday evening. Mr Pandit called both Henry Paulson, the US Treasury Secretary, and the Federal Reserve to ask for help. With that phone call, he set in motion a process that would end almost 200 years of independence for a bank that symbolised America's unchallenged financial prowess.

Mr Pandit and other Citigroup executives presented a bailout plan to Mr Paulson and Mr Geithner. Talks continued through Friday night and by Saturday morning a board meeting had been convened at the bank's Park Lane offices.

On the table was a range of options, including capital injections, federal guarantees and a proposal to hive off bad assets into a separate vehicle. Mr Pandit remained opposed to breaking up the bank and selling off Smith Barney, Citi's lucrative broking unit. Insiders described the meeting as tense.

Throughout the weekend, Robert Rubin, the former Treasury Secretary under President Clinton, Mr Paulson, representatives of the FDIC, the American bank guarantor, Mr Geithner, Mr Pandit and other members of the Citigroup board discussed the feasibility of any bailout.

They also argued over whether the Government should take preference shares in the bank, which would favour taxpayers with chunky dividends, or warrants, which would favour existing shareholders, whose holdings would not be diluted. One thing was agreed; that Citigroup was too big to be allowed to fail. By Sunday evening, Mr Paulson had briefed a number of senior congressmen of the Treasury's determination to rescue it.

While the potential size of the Citigroup bailout is unprecedented, Mr Paulson and Mr Geithner must have experienced a sense of déjà vu. This is the third rescue attempt the two men have worked on, after their efforts to salvage Bear Stearns in February and Lehman Brothers in September.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax