Sunday, January 4, 2009

Guidelines for the Citigroup Bailout Released While England Rethinks Its Options

The U.S. Treasury Department on Friday released guidelines of the program it used under a $700 billion bailout package to justify its $20 billion rescue of Citigroup.

It also unveiled guidelines for a new insurance program for troubled assets called the Asset Guarantee Program. At this point, Treasury said it is exploring the use of this insurance program to provide Citigroup with a guarantee of up to $5 billion as part of an agreement that was disclosed in late November when the Treasury, Federal Reserve Board and Federal Deposit Insurance Corporation announced their plans to help rescue Citigroup.

Both the guidelines for the $20 billion purchase of Citigroup stock and the new insurance program were delivered to Congress this week as required by law.

Under the new insurance program, Treasury said it would assume a loss position on certain assets that the department will select, and collect a premium.

Although Treasury is currently considering using the insurance program for Citigroup, its report to Congress seemed to leave open the possibility that other institutions may utilize it. Participation in the insurance program, Treasury said, would be determined on a "case-by-case basis."

"The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security," Treasury said.

Treasury noted that it is currently reviewing the possibility of developing other programs to insure troubled assets as well.

The program used to purchase the $20 billion of preferred Citigroup stock, meanwhile, has been dubbed the "Targeted Investment Program." So far only Citigroup has used this program, and it is unclear if other companies may be eligible to utilize it in the future.

Treasury said it considers five factors before deciding if a company is eligible for either the Targeted Investment or the Asset Guarantee programs.

Those include the extent to which the "destabilization of the institution could threaten the viability of creditors" and whether an institution is "sufficiently important to the nation's financial and economic system that a loss of confidence in the firm's financial position could potentially cause major disruptions to the credit markets."

On the other side of the pond, the Bank of England has been widely speculated to be looking at the possibility of cutting interest rates by 0.5% to 1.0% to their lowest level since it was founded more than 300 years ago.

Additionally, Chancellor Alistair Darling has been contemplating a second bailout of the English financial sector after it has been reported that the banks have not been openly generous in lending their influx of capital from the British Treasury. This is something that Darling would like corrected as he looks for ways for the banks to start loaning money again.

Under one option in England, a “bad bank” would be created to dispose of bad debts. The Treasury would take bad loans off the hands of troubled banks, perhaps swapping them for government bonds. The toxic assets, blamed for poisoning the financial system, would be parked in a state vehicle or “bad bank” that would manage them and attempt to dispose of them while “detoxifying” the main-stream banking system.

The idea would mirror the initial proposal by Henry Paulson, the US Treasury Secretary, to underpin the American banking system by buying up toxic assets. The idea was abandoned, ironically, when Mr Paulson decided to follow Britain’s plan of injecting cash directly into troubled banks.

Darling, Prime Minister Gordon Brown and Lord Mandelson, the Business Secretary, are expected to make the final decision on what extra help, if any, to give the banks by the end of the month.

Sources: The Wall Street Journal, Times Online

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