Massive 300-billion dollar rescue for Citigroup

26 11 2008

Massive 300-billion dollar rescue for Citigroup

AFP – Tuesday, November 25

WASHINGTON (AFP) – – The US government vowed Monday to safeguard the ailing economy, after stepping in to guarantee over 300 billion dollars in potential losses at Citigroup and pump 20 billion more into the financial giant.

The Citigroup rescue came shortly before midnight Sunday in a deal struck between federal officials and the financial giant ravaged by slumping stock prices.

“This is a tough situation for America. We’ll recover from it. The first step to recovery is to safeguard our financial system,” US President George W. Bush told reporters Monday.

He pledged his administration would take any future measures needed to shore up the struggling economy, after discussing the Citigroup rescue with Treasury Secretary Henry Paulson.

“If need be, we’re going to make these kind of decisions to safeguard our financial system in the future,” he said.

The news of the Citigroup bailout boosted European stock markets Monday, which posted gains of 10 percent and more, with Citigroup shares putting on nearly 60 percent in a spectacular reversal of fortunes.

The Dow Jones also soared, gaining some 4.70 percent to close at 8,424.75.

“The failure of Citi, with its two trillion dollar balance sheet, would have been absolutely catastrophic to the global banking system,” said Fred Dickson at DA Davidson & Co.

Citi operates in more than 100 countries and, with more than two trillion dollars in assets, is widely viewed as too big to be allowed to fail.

In a bid to ensure that Citigroup does not become the latest institution to fold, the Treasury Department will invest 20 billion dollars in the group, giving US taxpayers an eight percent stake in the company.

That cash injection will come from the Troubled Asset Relief Program, a 700-billion-dollar package approved by Congress earlier this year to thaw frozen credit markets and keep the US financial system working.

The government will also agree to shoulder any losses up to 306 billion dollars of “loans and securities backed by residential and commercial real estate and other such assets,” according to the joint statement by Treasury, the Federal Reserve and Federal Deposit Insurance Corp (FDIC).

The rescue plan came a week after the bank announced it was cutting 50,000 jobs worldwide on top of an earlier 22,000. At its peak last year, the company employed 375,000 people.

Citigroup, which last month reported a third-quarter loss of 2.8 billion dollars its fourth straight quarter in the red, will issue seven billion dollars in preferred stock to the US Treasury and the FDIC as payment for the 306 billion dollar guarantee.

It has agreed to comply with limits on “golden parachutes,” executive pay and privileges, and implement the FDIC’s mortgage modification program to limit home foreclosures.

Citi will also give the government warrants for about 254 million shares of the company’s common stock at a strike price of 10.61 dollars a share.

The guarantee calls for Citi to assume any losses on the portfolio up to 29 billion dollars and for the government to assume 90 percent of any losses above that level.

Citi’s chief executive officer, Vikram Pandit, said the bank appreciated “the tremendous effort” by the government to assure market stability.

“We are committed to streamlining our business and providing outstanding banking services to our clients around the world,” Pandit added.

A key player in the Citigroup negotiations was New York Federal Reserve president Timothy Geithner, named president-elect Barack Obama’s new Treasury secretary Monday.

“He plays a very important part in all of these discussions involving the financial markets and financial institutions in his role as president of the New York Fed,” said White House spokesman Tony Fratto.

Shares of Citigroup, a component of the blue-chip Dow Jones Industrial Average, have tumbled more than 70 percent since the start of the year, with the bank hit by hefty write offs linked to the US real estate crisis.

It is only the latest institution to run into trouble since investment bank Lehman Brothers filed for bankrupcty in mid-September. A day later the government bailed at American International Group (AIG), effectively nationalizing what had been one of the world’s largest insurers.




Citi rescue prompts criticism

Tue, Nov 25, 2008


WASHINGTON, USA – A WEEKEND rescue averted a potentially calamitous collapse at banking giant Citigroup, prompting relief on Wall Street but scepticism on the US government’s ability to stay ahead of the credit crisis.

The rescue announcement came shortly before midnight on Sunday, after federal officials reached an agreement with the financial giant hit with a swooning stock price and staggering losses.

The Treasury Department will invest US$20 billion (S$30 billion) in Citigroup, giving US taxpayers an eight per cent stake in the company. Additionally, the government will provide a guarantee on losses of some US$306 billion of troubled mortgage securities and related assets.

Citigroup will issue US$7 billion in preferred stock to the US Treasury and the FDIC as payment for the US$306 billion guarantee.

The guarantee calls for Citi to assume any losses on the portfolio up to US$29 billion and for the government to assume 90 per cent of any losses above that level.

Shares in Citi, which had been pummeled in recent weeks to historic lows, surged 57.8 per cent to close at US$5.95 on the news, sparking rallies on Wall Street and other markets.

Mr Brian Bethune, economist at IHS Global Insight, said the plan ‘breaks new territory in terms of further scaling up the case-by-case approach recently taken by the government in dealing with severe stresses on the financial system’. Mr Bethune said the plan may help steady the financial system but breaks new ground.

‘Perhaps the ultimate reality check is that the US government could have purchased Citigroup outright for about US$25 billion at the end of last week, which is far less that the US$45 billion in capital that the Treasury has pumped in to the capital base of the institution,’ he said.

Even though the rescue dilutes the existing shares, it helps ensure the survival of the banking giant, positive news for investors.

‘The failure of Citi, with its US$2 trillion balance sheet, would have been absolutely catastrophic to the global banking system,’ said Mr Fred Dickson at DA Davidson & Co.

‘The government is making sure Citi doesn’t fail. The price to Citi’s shareholders is high although they escape the onerous terms given to shareholders of (mortgages finance firms) Fannie Mae and Freddie Mac, which saw their companies essentially taken over by the government and their stock prices collapse.’

Other analysts said the plan set a dangerous precedent and may not be enough to steady the troubled banking system.

‘This deal could saddle the government with US$277 billion worth of losses – that’s because Citi can ‘cover’ its 10 per cent share with toxic waste – in effect adding to the government’s losses,’ said Mr Peter Cohan, a management consultant and professor at Babson College.

‘So much for capitalism without failure,’ said Mr Barry Ritzholtz of the research firm FusionIQ.

‘Where is the ‘protection’ for the taxpayers? Where are the clawbacks? How about going after the idiots that bought a third of a trillion dollars worth of junk, and then got paid large on it? Where is the sense of outrage and justice?’ Mr Yves Smith, analyst at the financial website Naked Capitalism, said the effort ‘cannot achieve its stated aim’.

‘The Fed inceasingly has been trying to stand in for private lenders, but it cannot take on the entire private sector,’ he said. ‘Trying to prop up bad loans in place merely ties up valuable lending capacity, throwing good money after bad.’

Some said the rescue was the only to prevent a further loss of confidence in the global financial system.

‘The decision came after Citigroup’s crashing stock price sparked concerns of a run on a bank with US$2 trillion in assets and operations in over 100 countries,’ said Ms Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.

‘Citigroup’s existing shareholders will be diluted in the near term, but over the longer term, the stock could be supported by the removal of the troubled assets … The deal could become a template for other large banks facing burgeoning losses.’





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