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US readies $20 billion bailout package for Citigroup

Source: PTI
November 24, 2008 11:35 IST
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US government on late Sunday announced plans to remove billions of dollars of 'toxic assets' from the balance sheet of crisis-ridden banking giant Citigroup, which suffered heavy losses on mortgage-related investments, media reports said on Sunday.

A Financial Times report said that the federal government had agreed to 'backstop' up to $306 billion in problematic assets and inject $20bn in capital to restore confidence in a bank, which is 'too big to fail'.

The FT report further stated that Citi has been asked to absorb the first $29bn in losses it sustains from problematic assets, and the federal government would 'stand behind as much as $277bn more'.

If the government has to take on the bigger losses, it would receive a stake in Citigroup, the New York Times said, noting the banking giant has been brought to its knees by gaping losses on mortgage-related investments.

The talks, the Wall Street Journal said, centered on the creation of what is sometimes called a "bad bank" -- an outside entity designed to hold some of a financial firm's worst assets.

That structure would help Citigroup cleanse itself of billions of dollars in potentially toxic assets and the new entity is expected to hold about $50 billion of assets, it quoted people familiar with talks as saying.

Taxpayers could be on the hook if Citi's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour, the paper said.

Behind the push, says the Journal, is a broad effort to shore up faith in Citigroup, which saw its stock price fall 60 per cent last week to a 16-year low.

Once the world's most valued bank, headed by NRI banker Vikram Pandit whose own job is reportedly under attack, Citigroup had over 375,000 employees at the end of last year and it aims to trim it down to below 300,000 as part of efforts to cut costs and help the crisis-ridden bank return to normalcy.

In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren't reflected there, the paper said, adding that some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books.

Even as they assured employees and investors last week that the company was on sound financial footing, Citigroup executives and directors knew they needed to do something fast to stabilise their reeling company.

Top government officials, including the heads of the Treasury Department and Federal Reserve, also have been scrambling to draw up contingency plans in case Citigroup's trouble intensified, the Journal said.

..and other agencies

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