US government reveals Citigroup rescue deal
Monday 24 November 2008
The US government unveiled a bold plan 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 US economy.
The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.
"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."
The move is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase's buyout of ailing Bear Stearns.
Six months later, the government was forced to take over mortgage giants Fannie Mae and Freddie Mac and throw a financial lifeline - which was recently rejigged - to insurer American International Group.
Critics worry the actions could put billions of taxpayers' dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.
The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated.
The 20 billion dollar cash injection by the Treasury Department will come from the 700 billion dollar financial bailout package. The capital infusion follows an earlier one - of 25 billion dollars - in Citigroup in which the government received an ownership stake.
As part of the plan, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to 306 billion dollars of risky loans and securities backed by commercial and residential mortgages.
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