Page last updated at 23:54 GMT, Monday, 24 November 2008

Citigroup shares jump on bail-out

Bush: 'This is a tough situation for America'

Shares in Citigroup have jumped by almost 60% as investors welcomed the US government's rescue plan for the bank.

The US Treasury is set to invest $20bn (13.4bn) in return for preferred shares in the troubled banking giant.

The Treasury and the Federal Deposit Insurance Corp will also guarantee up to $306bn (205bn) of risky loans and securities on Citigroup's books.

"Equity markets have responded positively to the Citigroup news," said Neil Mackinnon at ECU Group.

The new plan follows a $25bn injection of public funds in the bank last month.

Citigroup's market value fell to $20.5bn on Friday, compared with $270bn in 2006, as its shares plunged by more than 60% last week.

However they rallied by 58% on Monday.

The company has announced 52,000 job losses worldwide, on top of 23,000 job cuts previously announced. It employs around 12,000 people in the UK.

Citibank was founded in 1812 in New York
It has 200 million customer accounts
It operates in 100 countries

Citigroup has lost more than $20bn in the past year because of the global financial crisis, suffering four straight quarterly losses.

Citibank UK deposit holders are covered by the Financial Services Authority. The Financial Services Compensation Scheme guarantees up to 50,000 per Citibank account holder, should the bank go bust.

'Protecting taxpayers'

The action plan was announced after emergency talks over the weekend between the bank and the treasury department, the Federal Reserve and the Federal Deposit Insurance Corp.

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

Federal statement

Citigroup is one of the leading US banks and has operations in more than 100 countries.

Many analysts had calculated that the huge financial institution was too big to allow to fail.

"With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy," the three agencies said in a statement.

"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," the bank's chief financial officer Gary Crittenden said.

The cash injection will come from the $700bn financial bail-out fund created last month.

Focus on details

Many analysts believe the plan to rescue Citigroup will help reduce uncertainty in the market.

"We expect the US bail-out of Citigroup as well as Obama's promise of a major stimulus plan - with key Democrats suggesting numbers between $500bn and $700bn, much bigger than expected - to allow stock markets to gain across the globe, " said Dariusz Kowalczyk at CFC Seymour in Hong Kong.

This proudest of US banks has been humbled: the rescue is about as close to nationalisation as it's possible to get without the state taking 100% ownership.
Robert Peston
BBC Business editor

Markets are keenly awaiting for more details of the plan to be revealed.

"Clearly, this will stabilize the [banking] group near term," said Meredith Whitney at Oppenheimer & Co.

"We are still cautious on the potential future dilution from further prospective capital raises for the group as well as continued higher losses related to credit and asset deflation," he added.

"Management's future

Under the agreement, Citigroup does not have to replace chief executive Vikram Pandit and other top managers, but the government will be able to make decisions on their compensation.

"We appreciate the tremendous effort by the government to assure market stability," Mr Pandit, who took the top job at Citigroup in January, said in a statement.

He has come under fire for failing to turn around the bank.

"You're seeing an inept management team being rewarded by the US government," said William Smith at Smith Asset Management in New York.

The bank will not be able to pay out more than 1 cent per share quarterly dividend. The dividend now stands at 16 cent per share.

Seeking to stabilise the financial system, the US government has bailed out Bear Stearns, Fannie Mae, Freddie Mac and American International Group and injected hundreds of billions of dollars into financial institutions.

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