- The Washington Times - Monday, November 24, 2008

UPDATE:

The government plan to bail out colossal Citigroup with $306 billion in guarantees rallied U.S. stock markets broadly in the biggest two-day jump in 21 years Monday as President-elect Barack Obama unveiled his economic policy team and warned the economy is likely to worsen before it improves.

The Dow Jones Industrial Average soared nearly 397 points, bringing its advance since Friday to 11 percent. The broader Standard & Poors 500 zoomed up more than 51 points, or 13 percent since Friday. The value of Citigroup shares shot up 58 percent.

The bailout of Citigroup pushed the rally, which at one point sent the Dow up more than 500 points, and the prospect of another economic stimulus package seemed to be giving the market a helping hand. It was the biggest two-day rally for the market since 1987.

We have to do whatever is required in order to keep capital flowing, Mr. Obama told a news conference, saying he spoke earlier with President Bush.

President Bush has indicated he has the same approach, the same attitude. We are united in making sure the financial system works.

But, Mr. Obama said, the economy is likely to get worse before it gets better. Stocks in the financial and homebuilding sectors racked up some of the biggest gains of the day. Crude oil surged $4.52 to $54.45 a barrel on fears that OPEC again will cut production. But the price jump boosted energy stocks.

Job one is to continue to repair the psychology of this market, and the bailout or the help for Citigroup is an important part of that puzzle, James Dunigan, the managing executive for investments at PNC Wealth Management in Philadelphia, told Bloomberg Television.

Mr. Bush met with Treasury Secretary Henry Paulson and said afterward the government may help financial institutions again in the same way it did with Citigroup.

This is a tough situation for America, he said. But we will recover. The first step is to secure our financial system. If need be, were going to make these kind of decisions to safeguard our financial system in the future.

“We take threats to our financial system seriously and we stand ready to take any steps necessary to prevent systemic events,” said White House deputy press secretary Tony Fratto.

All of the major stock indexes rose more than 2 percent after the opening bell at the New York Stock Exchange, with the markets apparently ignoring more dismal news from the housing industry and a slight rise in oil prices.

Sales of existing homes fell 3.1 percent to a seasonably adjusted annual rate of 4.98 million in October, the National Association of Realtors reported. That marked a drop from 5.14 million in September.

The promised guarantees by three government agencies Sunday plus an agreement by the Treasury to give another $20 billion to Citigroup spurred the stock market into higher territory for the second consecutive session. Citigroup rebounded more than 60 percent after having lost more than 60 percent of its value last week. Other financials also rose on the bailout news.

The Treasury agreed Sunday night to give the bank another $20 billion from its $700 billion bailout fund on top of the $25 billion it received from the federal agency last month.

The Dow soared 494 points Friday, one of its biggest one-day increases. The S&P 500 plunged to an eleven and a half year low during the week.

“Obviously, the news out of Citi is welcoming,” CNNMoney.com quoted Peter Cardillo, analyst for Avalon Partners, as saying. “We might be in for another day of gains today.”

The Treasury, Federal Reserve, and Federal Deposit Insurance Corp. also agreed Sunday to cover some of the losses on $306 billion of troubled mortgages and other loans on Citibank’s books. The bank would be required to cover the first $37 billion to $40 billion of losses on those loans. After that, the Treasury would absorb $6 billion of losses, the FDIC would take on the next $10 billion of losses and the Fed would cover the rest.

In exchange for the assistance, Treasury and the FDIC would receive preferred stock in Citigroup, and the bank would limit the compensation of bank executives and create incentives for them to perform with the company’s long-term interest in mind rather than for short-term gain. The government would have to approve the company’s compensation plans.

Citibank also must limit the dividend it pays on company shares to one cent each quarter for the next three years.

Citigroup also agreed to try to prevent foreclosures on the mortgages it holds following procedures being used by the FDIC.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the agencies said in a joint 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 hastily arranged negotiations over the bank’s fate were spearheaded by Tim Geithner, the Fed’s New York bank president and President-elect Barack Obama’s pick for Treasury secretary. Citi Chief Executive Officer Vikram S. Pandit said the company “appreciate[s] the tremendous effort by the government to assure market stability.”

While most Asian stock markets fell when they opened Monday, the losses ebbed after the government announcement shortly before midnight U.S. time Sunday. Hong Kong’s Hang Seng Index closed down 1.6 percent and Australia’s S&P/ASX 200 actually gained 0.3 percent. In Europe, the key stock exchanges in Paris, London and Frankfurt were all higher in morning trading.

The rescue plan for Citibank appears designed as a template for assisting other banks with troubled loans on their books. Many banks have toxic mortgages and other loans that they have been unable to sell or otherwise dispose of.

Citibank was in a way a victim of Treasury Secretary Henry M. Paulson’s recent announcement that he would not use the bailout fund to purchase troubled assets from banks, as Congress originally intended. The decision prompted speculators to stage a run on the bank’s stock and bonds, which left Citibank shares Friday at slightly more than $3 a share, their lowest level in 16 years. Other eminent banks, including J.P. Morgan & Co. and Bank of America, also have suffered a renewed downturn in stock trading.

Citibank is by far the largest bank yet to seek assistance, and it was once the nation’s largest. It has $2 trillion of assets on its books,has another $1.25 trillion of questionable loan assets that the bank is only now taking onto its balance sheet from a previously off-balance-sheet entity that Citibank used to shield its riskiest investments from scrutiny.

Rob Cox, analyst at Breakingviews.com, said Citibank and the Fed had few good options to restore faith in the megabank. Not only is it too big to fail, but potential buyers like the giant European bank HSBC are put off by Citi’s enormous amount of bad loans.

“Investors have simply lost confidence in the ability of Citibank and its management to weather the financial and economic crisis,” he said.

Sen. Charles E. Schumer said earlier Sunday, while rumors were rife that some kind of plan was imminent, that Citibank’s viability was “really important for the whole economy.”

“If you let it go down, millions of innocent people are hurt, and the economy suffers at a time when it’s terribly, terribly fragile,” the New York Democrat said Sunday morning on ABC’s “This Week.”

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