Foreclosures Lead To Citigroup Crisis

The long arm of foreclosure has now touched Citigroup and that has led to further crash in the stock market. However the announcement that the government will weather the storm has once more infused the mood with confidence and stocks have risen. The government intends to buy Citigroup shares.

With the announcement Dow Jones made gains last Monday. The government is going to inject $20 billion into Citigroup hoping to keep the financial giant afloat. Investors are anticipating that by doing so the dark clouds hanging over the entire economy will somewhat clear. Many are of the opinion that by taking measures to support Citigroup the government is indicating its future steps in case of further bank failures.

The market however continues to be wary. In the last hour Dow was up by over 500 points but then later gave up some of its gains. Many investors wanted to take away money before further bad news rolled in.

The federal government will guarantee hundreds of billions invested in risky assets. Over and above this the government will also guarantee risky loans worth about $306 billion loans backed by commercial as well as residential mortgages. In return the government will be getting preferential shares worth $7 billion of Citigroup. Under an agreement on sharing of losses the initial $29 in losses will be taken by Citigroup. Thenceforth the government will take 90% of the losses that remained.

Citigroup will not pay quarterly dividends to its shareholders (of more than 1% per share for a period of three years) until it gets the green signal from three federal agencies. There are also restraints on bonuses and compensation of executives. Citigroup has also been called upon to negotiate amicable workouts with house owners who are at risk from foreclosure.

The plan will be miming another that has borrowers paying 3% for a period of five years. The rates are reduced so that the borrowers are not paying over and above 38% of their income (pretax) on house mortgage.

The details of the rescue plan for Citigroup came from Federal Deposit Insurance Corporation, Federal Reserve and Treasury Department. The report read, “With these transaction the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and U.S. economy. We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.” Till yesterday Citigroup was the largest international bank as per assets.