Rescue Plan Update

Here’s a quick update on Citigroup.

Plan to Rescue Citigroup Begins to Emerge

By ERIC DASH, at the NY Times

Excerpt:

Federal regulators were nearing approval of a radical plan to stabilize Citigroup on Sunday in which the government would soak up tens of billions of dollars in losses at the struggling bank, according to people briefed on the discussions.

The plan, which emerged after a harrowing week in the financial markets, would mark the government’s third effort in as many months to contain the deepening economic crisis. While the negotiations were in flux on Sunday night, the proposal, if applied to other banks, could set the precedent for other multibillion-dollar financial rescues.

Citigroup executives presented a plan to federal officials on 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 now 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 escalating losses at Citigroup and other banks. Each previous government effort 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. Mr. Obama signaled that he would pursue a far more ambitious plan of spending and tax cuts than he had outlined during his campaign and planned to announce his economic team on Monday. Some Democrats in Congress, meantime, were calling for the government to spend as much as $700 billion to stimulate the economy over the next two years...

Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks, who spoke on the condition that they not be identified because the plan was still under discussion.

If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing shareholders…

It was unclear on Sunday night exactly how the Citigroup arrangement might work...

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 now, 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. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail...

 

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