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, reports CBS News correspondent Kelly Wallace. 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 on CBS' The Early Show.
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.
"Most of the people who have looked at it, the small hours of this morning, have said this is a lot of taxpayer risk in return for not much," Krugman told co-anchor Maggie Rodriguez.
"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."
With other bailouts seemingly having done nothing to boost consumer confidence, Rodriguez asked, why do it if it is not well-structured?
"Well, you know, things could be worse, you know? That's been the moral of this crisis: things can always be worse,' Krugman said, "and they have been getting worse.
"Things could be much worse than they are. It's what hasn't happened, not what has, is the justification. We had to do this, but we should have done it better."
As part of the plan, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.
Under the loss-sharing arrangement, Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. Money from the $700 billion bailout and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.
In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup. In addition, Citi said it will issue warrants to the U.S. Treasury and the FDIC for approximately 254 million shares of the company's common stock at a strike price of $10.61.
As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.
Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners. Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.
Under the IndyMac plan, struggling home borrowers pay interest rates of about three percent for five years. Rates are reduced so that borrowers aren't paying more than 38 percent of their pretax income on housing.
The IndyMac plan also was used as a model for a new program by mortgage finance companies Fannie Mae and Freddie Mac and for two other failed thrifts taken over by the government on Friday. FDIC Chairman Sheila Bair has been pressing Treasury to use $24 billion from the $700 billion bailout program to put the mortgage modification program on national footing, but Paulson is opposed to that idea.
Overseas Markets, Wall Street Respond
Wall Street showed relief early Monday over the government's plan to bail out Citigroup - a move it hopes will help address some of the uncertainty hounding the financial sector. Stock index futures contracts indicated the market was poised to extend a sharp rally from Friday.
Investors also cheered the idea that the government could introduce another economic stimulus plan. President-elect Obama is set to introduce his economic team on Monday, which is key to putting into place a huge economic recovery plan that targets saving or creating 2.5 million jobs during the next two years.
Krugman said that the announcement that Obama has picked New York Federal Reserve president Tim Geithner as his Treasury Secretary and Lawrence Summers to head the White House National Economic Council (whom he described as "terrifically smart and terrifically forceful guys") is good news.
"Great to have the best people on board," Krugman told Rodriguez. "This is the one thing really encouraging right now."
In a relief rally over the government's plan to bail out Citigroup, Wall Street barreled higher for the second straight session. The , bringing their two-day advance to more than 880, or 11 percent.
Asia breathed a little easier after the U.S. government cast a lifeline to Citigroup, averting what many believed would have been a catastrophe for the global financial system.
Yet shares of financial companies dropped across the region as the bailout, widely expected by investors given Citigroup's size and scope, highlighted persistent worries about the problems facing the banking sector.
Critics said the bailout creates a moral hazard that will eventually backfire because it effectively rewards the bank for taking unacceptable business risks.
"This challenges the existing rules in the industry and might affect the fairness of competition," said Yu Xiaoyi, chief researcher for Guangfa Securities, in the Chinese southern city of Guangzhou. "This should be a lesson for China's own banks about risk controls."
But many welcomed the deal as saving the global financial system, already stricken by the year-old credit crunch that originated from a mountain of toxic mortgages in the U.S., from further mayhem.
"If they didn't help, the damage would be beyond imagination," said Teck-Kin Suan, economist at United Overseas Bank in Singapore. "The scale is so much larger than Lehman Brothers," the storied Wall Street investment bank that filed for Chapter 11 bankruptcy protection in September after the U.S. government refused to rescue it.
"One thing that makes this time particularly difficult is that the financial system is broken," Mark Zandi of Moody's economy.com told CBS News."It's now increasingly difficult to get credit, whether you are someone with a good credit score or a business with a pristine balance sheet. That's going to make this particular recession, particularly severe."
Some are hoping this week at least will be somewhat calm, because there are not a lot of big economic numbers being released, and it's a short trading week because of the Thanksgiving holiday.
Meanwhile, Citigroup Hires … In The Philippines
Citigroup may be cutting jobs worldwide, but it is hiring more workers in the Philippines, where it plans to establish a regional hub for its call centers, company officials said Monday.
"Citi is repositioning in Asia Pacific but we remain focused on growth," country business manager Mark Jones said in a statement.
"As we review our operations and see where we can be more efficient, something which we have been doing even before the downtrend in the global financial markets, we in the Philippines are optimistic that instead of reducing headcount, we will be growing," he added.
He did not elaborate on the number of expected new jobs to be created. Citigroup currently more than 4,000 employees in the Philippines. The planned additional call centers mostly deal with overseas customers.
The Philippine Daily Inquirer quoted Jones as saying the company would likely hire 1,000 more people in the coming year. This could not immediately be confirmed independently.
Last week, Citigroup Chief Executive Vikram Pandit announced 50,000 additional job cuts on top of 22,000 cuts previously announced.