CITIGROUP SHARES soared by more than 60 per cent in early trading yesterday after the US government agreed to put up to $300 billion (€233 billion) behind the troubled group in a move that also helped global stocks rally sharply.
Citi's stock - which had plunged to $3.77 on Friday after a five-day decline that threatened what had recently been the world's premiere financial institution - bounced up 62 per cent in midday trading to $6.14.
The government's rescue package, finalised near midnight on Sunday after two days of non-stop negotiations, sparked concern that other banks would expect similar treatment if their share prices came under fire.
But Washington's primary concern was to shore up Citi, a global institution that defines the term "too big to fail". In a conference call with employees, Vikram Pandit, Citigroup chief executive, said as much, declaring that "this was about the US financial system and the banking system".
After declaring that the government package resulted in a "much stronger Citi", Mr Pandit added that the deal amounted to "a complete show of confidence and support as to who we are and what we do". According to terms of the deal, the government will stand behind some $306 billion in Citi's domestic assets, a basket that includes residential mortgages, commercial real estate, leveraged loans and auction-rate securities.
Citi will be responsible for the first $37 billion in losses recognised on these assets. But 90 per cent of any losses that occur in the remaining $269 billion will be borne by the government.
The arrangement also provides for the injection of $20 billion in new capital to Citi, for which the bank will issue preferred shares to the government, paying dividends at 8 per cent annually.
Jason Goldberg, bank analyst at Barclays Capital, said the rescue package was superior to attempted bailouts of insurance giant AIG as well as Fannie Mae and Freddie Mac. "The government learns from past experiences," he said. "This is much less onerous to equity holders."
Asian stock markets drew little cheer from the Citi rescue plan. But the reaction in Europe was far more positive, as the FTSE 100 index in London jumped 9.8 per cent - its biggest one-day rise - and shares in Germany and France climbed 10 per cent. In New York, the SP 500 was up 4.5 per cent in midday trading.
Mike Lenhoff, chief strategist at Brewin Dolphin, said the markets were primed to respond to the good news on Citigroup after suffering steep falls last week.
Other analysts said gains were due, at least in part, to investors covering short positions. - ( Financial Timesservice)
