Federal agencies bailing out Citi

U.S. gets $20 billion stake, backs as much as $306 billion in loans

November 24, 2008|By From Sun news services

WASHINGTON - The government unveiled a bold plan last night to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stocks has been hammered in the past week on worries about its financial health.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the three agencies said in a statement issued last night. "We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks," they said.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one - of $25 billion - in Citigroup in which the government received an ownership stake.

In addition, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

The plan, which emerged after a harrowing week in the financial markets, is the government's third attempt in three months to contain the deepening economic crisis. The plan, if applied to other banks, could set precedent for other multibillion-dollar financial rescues.

Citigroup executives presented a plan to federal officials Friday evening after a week-long plunge in the company's share price threatened to engulf other big banks. In tense, around-the-clock negotiations that stretched through the weekend, it became clear that the crisis of confidence had to be defused or the financial markets could plunge further.

Whether this latest rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by increasing losses at Citigroup and other banks. Each previous effort - last month's $700 billion industry bailout and September's $85 billion package for insurer American International Group - initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook has worsened, raising worries that more bank loans were turning sour.

President-elect Barack Obama was also working over the weekend to shore up confidence in the rapidly faltering economy. Obama signaled that he will pursue a far more ambitious plan of spending and tax cuts than what he had outlined during his campaign. Some Democrats in Congress, meanwhile, were calling for the government to spend as much as $700 billion to stimulate the economy over the next two years.

Obama's expected choice for Treasury secretary, Timothy Geithner, the president of the Federal Reserve Bank of New York, played a crucial role in the negotiations with Citigroup, whose shares have plunged 87 percent this year. While the initial focus of government officials was to help the embattled company, they may also seek to draw up an industrywide plan that could help other banks.

The plan could herald another shift in the government's financial rescue. The Treasury Department first proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions. Neither plan, however, restored investors' confidence for long.

The plan could herald another shift in the government's ever-changing financial rescue plans. The Treasury Department initially proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions.

Once the nation's largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year, and few analysts think the pain is over. Many investors worry that the bank needs additional capital.

With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Indeed, Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

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