- The Washington Times - Tuesday, November 25, 2008

The Bush administration expects to bail out more big banks like Citigroup before leaving office, and is considering asking Congress for the remaining $350 billion of Treasury bank-rescue funds to make sure it has money to do so.

“We have made these kinds of decisions in the past, made one last night, and if need be, we’re going to make these kinds of decisions to safeguard our financial system in the future,” President Bush said after meeting with Treasury Secretary Henry M. Paulson Jr. on Monday.

Many other banks in the United States have sizable portfolios of troubled mortgage loans like Citibank, including Bank of America, which acquired Countrywide’s huge toxic-mortgage portfolio last year, and JP Morgan, which took on some of Bear Stearns’ troubled assets last spring. Mr. Paulson is expected to address the question of more bank rescues at a news conference Tuesday morning.

The Treasury’s dramatic midnight rescue of Citibank prompted elation in financial markets worldwide on Monday. The Dow Jones Industrial Average rose nearly 400 points, or 6 percent, completing its biggest two-day gain since 1987, while stock markets in Britain and Germany each jumped by more than 10 percent.

Mr. Bush said he told President-elect Barack Obama about his decision to throw a financial lifeline to Citigroup and got his assent. Mr. Obama later pledged to “honor the commitments” that Mr. Bush has made to rescue Citibank and other major financial institutions.

“Any time we make a big decision during this transition, he will be informed, as will his team,” Mr. Bush said. Timothy F. Geithner, the New York Fed chief and Mr. Obama’s pick to be Treasury secretary, was deeply involved in crafting the Citibank rescue.

“Secretary Paulson is working closely with the president-elect’s transition team,” Mr. Bush said. “It’s important for the American people to know that there is close cooperation.”

Citigroup Inc. was facing a death spiral in financial markets that drove its stock price to a 15-year low of $3.77 last week. After getting a second $20 billion cash infusion from the Treasury late Sunday and limited guarantees against losses on $306 billion of troubled mortgage loans, the bank’s stock vaulted 58 percent to $5.95 on Monday.

White House spokesman Tony Fratto said that other large banks that are too big to fail will also be assisted.

“When you have systemically large companies that can bring down not just the entire financial system, but the global financial system, and have a devastating effect on our broader economy, the government has to step in,” he said.

The White House did not specify what other banks might be rescued, but Mr. Fratto said it will not wait for the firms to be on the verge of collapse like Citibank before acting.

JP Morgan and Bank of America got hammered in financial markets like Citigroup last week as short-sellers targeted them to make quick money as their stocks dropped. The stocks of both banks jumped in response to the Citigroup rescue Monday, sending the Standard & Poor’s 500 index to a record gain.

The Citibank rescue sends “a clear message of support for this and other systemically important banks,” said Standard & Poor’s credit analyst Tanya Azarchs. “In particular, we believe the statement by the U.S. government that it will ‘use all of our resources to preserve the strength of our banking institutions’ is an unprecedented and powerful expression of implicit support during at least the next two years.”

With the Citibank rescue, the Treasury has now committed all but $40 billion of the first $350 billion Congress gave the department to aid faltering banks. Mr. Paulson barely a week ago said he hoped to reserve the rest of the funds, after financing a “modest” bailout of consumer finance companies, for Mr. Obama to use when he takes office.

However, the emergency caused by Citibank’s rapid demise last week forced him once again to change course. By Monday, the Treasury was indicating that he may ask Congress for the second half of the $700 billion fund. Congress is expected to come back for a post-Thanksgiving session in the second week of December.

The Citibank rescue created a template for possible future actions on banks. It offered the combination of an additional cash infusion from the Treasury and a limited federal guarantee against mortgage losses in exchange for preferred stock, on which the government will earn 8 percent interest.

The deal, part of which was written on generic documents that could be applied to any bank, also stipulates that Citibank must limit stock dividends for three years, follow a mortgage-foreclosure prevention program developed by the Federal Deposit Insurance Corp., and curb executive compensation.

David Woo, analyst with Barclays Capital, said the rate of return the government is receiving on its Citigroup stock is low compared with the lucrative deals struck by other recent angel investors in banks, and may raise objections in Congress, making it difficult to use the same model for other bank rescues. He expects market optimism about the plan to be “relatively fragile.”

“Citi’s terms are too lenient,” said Hugo Dixon, analyst with Breaking views.com. “Citi’s rivals would be sure to demand similar packages.”

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