Citibank's "Sweet Deal" From Government

By: CBS News
By: CBS News
The struggling bank lands a $20 billion lifeline, along with $306 billion in loan guarantees.  President Bush hints more bailouts are possible.

** FILE ** The Citibank logo is shown on a branch office in this April 11, 2007 file photo in New York. Citigroup Inc. has gotten $12.5 billion in much-needed cash from a batch of investors as it posted its first quarterly loss in 16 years in the fourth quarter, when the bank's mortgage portfolio lost $18.1 billion in value. (AP Photo/Mark Lennihan, file)

WASHINGTON - The U.S. government unveiled a $20 billion rescue plan on Sunday for troubled banking giant Citigroup, once the country's biggest and strongest financial institution.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. after a weekend of tense negotiations, is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already-crippled financial system and the U.S. economy.

President George W. Bush said Monday he consulted with President-elect Barack Obama on the Citigroup rescue. Mr. Bush said there is "close cooperation" between his administration and the Obama camp.

Mr. Bush, speaking outside the Treasury Department after consulting with Secretary Henry Paulson, also said the measures used to help Citigroup could be extended to other institutions in need of federal assistance.

"We have made these kind of decisions in the past. We made one last night and if need be we will make these kind of decisions to safeguard our financial system in the future."

In addition to an investment of $20 billion in Citigroup, the government plan also guarantees up to $306 billion in risky loans. This is on top of the $25 billion the government has already pumped into Citigroup.

The money will come in exchange for shares that will pay eight percent back to the taxpayer; Citigroup also agrees to place limits on executive pay and help homeowners facing foreclosure. But some analysts say the bailout doesn't go far enough - and that the company will need much more from Uncle Sam.

"The $20 billion is about 10 percent of what Citicorp needs to get back to financial health," said Sean Egan of Egan-Jones Ratings Company. "They need about 200 billion, they got 20."

Still, some experts said the government's action was necessary.

"If Citigroup had not been bailed out, then the whole financial system could collapse," said Princeton economics professor Paul Krugman.

But is the government bailout of Citigroup well-structured, and are taxpayers getting a fair deal here?

Krugman, author of "The Return of Depression Economics and the Crisis of 2008" (Norton), says on first read, no.

"It looks like a very sweet deal for Citigroup management, very sweet deal for Citigroup shareholders, to the extent they have anything left - not very good for the taxpayer. This was not good."


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