Government officials in the US worked through the weekend on plans to shore up confidence in the future of Citigroup, the financial giant whose shares cratered last week.
Talks centred on a scheme for American taxpayers to absorb future losses on Citigroup's riskiest investments, in return for an increased stake in the company. One plan involved the creation of a government-guaranteed "bad bank" into which billions of dollars of assets would be transferred.
Citigroup has assets of more than $2 trillion and was handed $25bn last month as part of the US government's Wall Street bailout plan, but after four consecutive quarters of losses, analysts believe it still needs to raise more money to cover write-downs to come on its remaining mortgage investments and customer loans.
Its shares plunged by 60 per cent last week, generating headlines that alarmed executives, who feared a full-blown crisis of confidence that could destabilise the operations of the bank.
Timothy Geithner, the president of the New York Federal Reserve bank, who will be announced today as President-elect Barack Obama's first Treasury secretary, was among the senior government officials working on the rescue package, as Citigroup rolled out new adverts yesterday aimed at soothing public and client fears.
On both sides of the Atlantic, customer deposits are protected by government insurance schemes, and Citigroup has access to funds from the Federal Reserve to meet liabilities to clients, making its situation substantially different to that of Lehman Brothers or Bear Stearns, which collapsed earlier this year. However, there are concerns over the effect on the wider financial system, should a rescue package not be forthcoming for Citigroup, given the depth of its retail and investment banking operations.
"The basic parts of Citigroup are good, solid and money-making," said the New York Senator Charles Schumer. "Top leaders are talking this weekend and they are confident they can come up with a plan that ensures Citi's viability. When you have a major institution, which has tentacles everywhere, if you let it go down then millions of innocent people get hurt."
The Citigroup board has been examining whether sacking the chief executive, Vikram Pandit, might restore confidence, or whether the company should ask for another injection of funds from the US government.
"Hopefully it will be a positive news story – the market will take anything at this point," said Joe Saluzzi, the co-manager of trading at Themis Trading in New Jersey. "If we get nothing out of Citi, we have a little bit of a problem."