Hit HardBy Reuters - | Posted 2008-11-24 Print
Citigroup's rescue marks the latest government effort to contain a widening financial meltdown that has caused the disappearance or bankruptcies of companies including Bear Stearns, Lehman Brothers and Washington Mutual. The government's $20 billion of new capital comes on top of $25 billion it had put into the second-largest U.S. bank by assets, and it will receive preferred shares with an 8 percent dividend in return.
Earlier this month, U.S. Treasury Secretary Henry Paulson said the $700 billion industry rescue package would instead be used as a means to provide direct capital injections to banks.
That decision hurt Citigroup hard, and the bank's problems were compounded by the tens of billions of dollars of assets that it decided to buy back or move onto its balance sheet.
Citigroup's market value on Friday was just $20.5 billion, down from more than $270 billion two years ago -- and even below the $25 billion initial capital injection.
"In the near term it reduces systemic risk, but it does raise questions about what it means for the industry longer-term," said David Forrester, foreign exchange strategist at Barclays Capital in Singapore.
On Nov 12, analysts at CreditSights Inc said capital at Bank of America Corp and Wells Fargo & Co could "fall short of the comfort zone" in a very severe recession.
Bank of America is buying Merrill Lynch & Co and in July bought troubled mortgage lender Countrywide Financial Corp, and Wells Fargo is buying Wachovia Corp. Merrill and Wachovia have had significant losses tied to mortgages.
Citigroup's agreement recalls JPMorgan Chase & Co's purchase of Bear and Switzerland's rescue package for UBS AG and Citigroup's own bid for Wachovia, with government backing to absorb some of a bank's losses. Wells Fargo outbid Citigroup for Wachovia, and did not seek government backing.
In Europe, Citi's shares soared on the news of the rescue. In Frankfurt, the bank's shares were up 41.89 percent at 4.2 euros at 0819 GMT.
(Additional reporting by Glenn Somerville in Washington)
(Reporting by Dan Wilchins and Jonathan Stempel; Editing by Jean Yoon and Rupert Winchester)
© Thomson Reuters 2008 All rights reserved
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