Citigroup won't be getting a new corporate jet after all.
Under pressure from President Barack Obama, one of the nation's largest banks reversed course, announcing that it will not take delivery of the jet it had planned to purchase before the credit crisis unfolded.
The canceled deal came as many politicians voiced concern about how banks are spending government bailout money.
The White House reached out to Citigroup on Monday to reiterate Obama's position that such jets are not "the best use of money at this point," calling them "outrageous" spending for a company getting taxpayer dollars, said a White House official who spoke on condition of anonymity because the official was describing private conversations.
In a statement late Monday, Citigroup Inc. said it paid a deposit in 2005 to acquire the jet. The New York-based bank said it did not plan to use government money for the purchase, and it noted that any cancellation of the deal would probably lead to multimillion-dollar penalties.
On Monday, the New York Post reported that Citi was set to take possession of the jet even after receiving $45 billion from the government.
The government is also providing guarantees on hundreds of billions of dollars of Citi investments in mortgages and other troubled investments.
With the cancellation of the jet deal, a deposit on the plane will be lost, but is recoverable once the jet is sold, according to a person familiar with the situation. Citi was in the process of purchasing a Dassault Falcon 7X for $50 million, the person said.
Citi is also planning to cut the number of corporate jets in its existing fleet from five to two, said the person, who also spoke on condition of anonymity because the details have not been made public.
Corporate jets have become controversial during the credit crisis as critics of large companies question the cost of owning and operating the aircraft, especially for businesses receiving government help.
In November, executives of automakers Ford Motor Co., General Motors Corp. and Chrysler LLC were sharply criticized for flying on corporate jets to Washington to ask Congress for federal bailout money.
Amid the credit woes, Citi has been working to streamline its operations and shed assets to regain profitability. The bank has posted five consecutive quarterly losses, including a fourth-quarter loss of $8.29 billion.
Earlier this month, Citi reached a deal to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley. Citi has also announced plans to split its operations into two units, separating its traditional banking businesses from its riskier operations.
Citi may have to wait a while to recover its deposit on the canceled jet deal, as the market for corporate aircraft has softened with the economy.
Before the jet market cooled last year, speculators sometimes placed orders with no intention of taking delivery of the plane. They would sell their position in line.
"There was such a backlog — three- or 3 1/2-year waits — people could buy positions and flip them for a profit," said Robert F. Agnew, president and chief executive of aviation consulting firm Morton Beyer & Agnew. "Selling a slot today is probably very difficult."
Agnew said buyers typically pay a few percentage points of the purchase price when placing the order, then a series of payments as production begins and other milestones are reached.
They might pay about 35 percent of the cost before taking delivery, then pay the balance when taking the plane, he said. At that rate, Citi could have already spent $17.5 million on a plane it will no longer receive.
Agnew noted that upfront costs can be much lower when the buyer and seller have a strong relationship, but he said he was not familiar with Citigroup's arrangement with Dassault.