WASHINGTON – rushing to rescue Citigroup, the government agreed to shoulder hundreds of billions of dollars in potential losses in the bank and struck a new plow $ 20 million in the company.
Hope that the regulation of the dramatic action to strengthen the badly shaken confidence in the once mighty giant of banking, as well as the nation’s financial system, a goal that has so far been elusive despite a series of government interventions to combat worst global crisis since the 1930s.
Wall Street seemed to encourage actions such as futures moved higher before the market opening in New York. Dow Jones industrial average futures rose nearly 2 percent. Stock markets in Britain and Germany gained more than 4 percent in afternoon trading. Shares of Citigroup rose themselves 44 percent to 5.64 dollars in pre-trading.
“If you do not help, the damage would be beyond imagination,” said Suan Teck Kin, economist at United Overseas Bank in Singapore.
The measure, announced late Sunday by the Treasury Department, the Federal Reserve and Federal Deposit Insurance SA, is intended to underpin a major financial institution whose collapse could cause havoc on the already fragile financial system and economy of the United States. UU ..
“With these operations, the U.S. government is taking steps to strengthen the financial system and to protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement together. “We will continue using all our resources to preserve the soundness of our banking institutions, and promote the process of repair and recovery and risk management.”
Said an analyst at Citigroup have not yet taken advantage of weak credit markets and caused incalculable losses among the institutions holding the debt and financial products backed by the company.
“It would create chaos,” said Winson Fong, managing director of SG Asset Management in Hong Kong, which oversees about $ 3 billion in shares in Asia. “In short, you can not borrow or lend for a while. This is a nightmare scenario.”
The bold move is the latest in a string of high profile government’s rescue efforts. The Fed in March, provided financial support to the JPMorgan Chase acquisition of Bear Stearns in crisis. Six months later, the government was forced to pay the mortgage giants Fannie Mae and Freddie Mac to throw a life preserver and financial – that was recently rejiggered – the insurer American International Group.
Critics worry the action could put billions of taxpayer dollars at risk and to encourage financial companies to take excessive risks in the belief that the government bail out of their trouble.
The rescue of Citigroup came after a weekend of marathon talks led by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, which is being tapped by President-elect Barack Obama as his Treasury chief also participated.
Vikram S. Pandit, Citi’s chief executive, welcomed the action. “We appreciate the tremendous effort by the government to ensure market stability,” he said in a statement issued early Monday.
The $ 20 billion cash injection by the Treasury Department will come from the $ 700 billion financial bailout package. The capital infusion follows a previous one – $ 25 million – at Citigroup in which the government also received a game property.
As part of the plan, the Treasury and the FDIC guarantees against the possibility that unusually large losses “of up to $ 306 billion of loans and risk securities backed by commercial mortgages residential y.
Under the loss-sharing agreement, Citigroup Inc will assume the first $ 29 million in losses in the pool of risk assets. Beyond that amount, the government would absorb 90 percent of the rest of the losses, Citigroup and 10 per cent. Money from the $ 700 billion rescue fund and the FDIC to cover the government of the portion of potential losses. The Federal Reserve would fund the remainder of the assets with a loan from Citigroup.
In exchange for the guarantees, the government receives $ 7 billion in preferred shares of Citigroup. In addition, Citi said it will issue orders to the U.S. Treasury and the FDIC to approximately 254 million shares of company common shares at a price of 10.61 dollars.
As a condition for the rescue, Citigroup is prohibited from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains the consent of the three federal agencies. The bank is currently paying a dividend of 16 cents, half of a 32-cent profit in the previous quarter. The agreement also imposes restrictions on executive compensation, including bonuses.
Importantly, the agreement calls for Citigroup to take steps to help distressed homeowners.
Specifically, Citigroup modify mortgages to help people avoid foreclosure along the lines of a plan for the FDIC, which took effect in Indymac Bank, a major non savings and loan based in Pasadena, California
Under the plan Indymac, struggling home borrowers pay interest rates of around three per cent over five years. Reduced rates so that borrowers are not paying more than 38 percent of their pretax income on housing.
Indymac The plan was also used as a model for a new program by the mortgage finance companies Fannie Mae and Freddie Mac, and for two other thrifts not taken by the government on Friday. FDIC Chairman Sheila Bair has been pressing the Treasury to use $ 24 million from U.S. $ 700 million program to rescue the mortgage on the amendment of the national standing, but Paulson was opposed to that idea.
Citigroup has seen its shares lose 60 percent of its value last week, reflecting a crisis of confidence among skittish investors. They are worried all the risk on the debt of Citigroup stock will be converted into losses as the economy worsens turbulent markets and stay – losses that could be almost impossible to reverse.
Citigroup is one of those big, interconnected player in the financial system that is seen by Washington as policymakers too big to fail. The company has operations spanning the world in over 100 countries.
Citigroup analysts considered the most vulnerable among major U.S. banks – Especially after he did not nab Wachovia Corp., which was purchased instead of Wells Fargo & Co. That was a missed opportunity for Citi to get their hands on the much-needed U.S. deposits to strengthen its cash position.
Citigroup has been particularly affected by the merger of risk, subprime mortgages to people with tarnished credit or low income. Foreclosures on mortgages spiked, leaving Citi and other financial institutions wracking up huge losses on investments eliminated. The company did not turn a profit for the past four quarters, and has announced plans to reduce thousands of jobs.