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2008-11-24 08:37:20
The US government has announced a rescue plan for troubled banking giant
Citigroup after its shares plunged by more than 60% last week.
The US Treasury is set to invest $20bn ( 13.4bn) in return for preferred shares
in Citigroup.
The Treasury and the Federal Deposit Insurance Corp will also guarantee up to
$306bn ( 205bn) of risky loans and securities on Citigroup's books.
The plan follows a $25bn injection of public funds in the bank last month.
Citigroup's market value fell to $20.5bn on Friday, compared with $270bn in
2006.
Last week the company announced 52,000 job losses worldwide, on top of 23,000
job cuts previously announced. It employs around 12,000 people in the UK.
Citigroup has lost more than $20bn in the past year because of the global
financial crisis, suffering four straight quarterly losses.
Citibank UK deposit holders are covered by the Financial Services Authority.
The Financial Services Compensation Scheme guarantees up to 50,000 per
Citibank account holder, should the bank go bust.
'Protecting taxpayers'
The action plan was announced after emergency talks over the weekend between
the bank and the treasury department, the Federal Reserve and the Federal
Deposit Insurance Corp.
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
Federal statement
Citigroup is one of the leading US banks and has operations in more than 100
countries.
Many analysts had calculated that the huge financial institution was too big to
allow to fail.
"With these transactions, the US government is taking the actions necessary to
strengthen the financial system and protect US taxpayers and the US economy,"
the three agencies said in a statement.
"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 added.
The cash injection will come from the $700bn financial bail-out fund created
last month.
Focus on details
Many analysts believe the plan to rescue Citigroup will help reduce uncertainty
in the market.
This proudest of US banks has been humbled: the rescue is about as close to
nationalisation as it's possible to get without the state taking 100%
ownership.
Robert Peston
BBC Business editor
"We expect the US bail-out of Citigroup as well as Obama's promise of a major
stimulus plan - with key Democrats suggesting numbers between $500bn and
$700bn, much bigger than expected - to allow stock markets to gain across the
globe, " said Dariusz Kowalczyk at CFC Seymour in Hong Kong.
Markets are keenly awaiting for more details of the plan to be revealed.
"Clearly, the market focus today will be on the release of a concrete rescue
plan for the bank, details of which remain fluid; reports so far have noted
that any infusion plan is provisional and subject to change," said Sue Trinh at
RBC Capital Markets in Sydney.
"Does this mean support for other financial institutions will be this big? Does
this mean there will be more problems around calculation of so-called toxic
assets? It's too early to say," said Tony Morriss at ANZ Bank in Sydney.
Management's future
Under the agreement, Citigroup does not have to replace chief executive Vikram
Pandit and other top managers, but the government will be able to make
decisions on their compensation.
CITIGROUP
Citibank was founded in 1812 in New York
It has 200 million customer accounts
It operates in 100 countries
Source:Citigroup
Mr Pandit, who took the top job at Citigroup in January, has come under fire
for failing to turn around the bank.
"You're seeing an inept management team being rewarded by the US government,"
said William Smith at Smith Asset Management in New York.
The bank will not be able to pay out more than 1 cent per share quarterly
dividend. The dividend now stands at 16 cent per share.
Seeking to stabilise the financial system, the US government has bailed out
Bear Stearns, Fannie Mae, Freddie Mac and American International Group and
injected hundreds of billions of dollars into financial institutions.