An ongoing snapshot of the national and world ecomony. Designed for the busy professional who requires more than soundbites and taglines, but does not have time to read it all.
Showing posts with label Federal government of the United States. Show all posts
Showing posts with label Federal government of the United States. Show all posts
If cheap credit was the crack cocaine of this financial crisis — and it was — then China was one of its primary dealers. China is now the largest creditor to the U.S. government, holding an estimated $1.7 trillion in dollar-denominated debt. That massive build-up in dollar holdings is specifically linked to China's efforts to control the value of its currency. China didn't want the renminbi to rise too rapidly against the dollar, in part because a cheap currency kept its export sector humming — which it did until U.S. demand cratered last fall."
NEW YORK — The latest bailout of Citigroup (C) helped soothe financial markets Monday and could serve as a model for other U.S. banks looking for help with their large portfolios of toxic assets.
The U.S. government late Sunday offered $20 billion for Citi preferred stock, on top of the $25 billion it has already given the bank. But this time, the government also said it will assume 90% of losses from Citi's $306 billion portfolio of loans related to bad mortgages if the losses exceed $29 billion, in return for another $7 billion in Citi preferred stock.
The news boosted Citi shares 58% to $5.95, helped lift other battered financial stocks and triggered a broad market rally Monday in which the Dow Jones industrials surged 397 points to 8443.
NEW YORK — The latest bailout of Citigroup (C) helped soothe financial markets Monday and could serve as a model for other U.S. banks looking for help with their large portfolios of toxic assets.
The U.S. government late Sunday offered $20 billion for Citi preferred stock, on top of the $25 billion it has already given the bank. But this time, the government also said it will assume 90% of losses from Citi's $306 billion portfolio of loans related to bad mortgages if the losses exceed $29 billion, in return for another $7 billion in Citi preferred stock.
The news boosted Citi shares 58% to $5.95, helped lift other battered financial stocks and triggered a broad market rally Monday in which the Dow Jones industrials surged 397 points to 8443.
Analysts say the backstop was essential to calm investors worried that the values of U.S. bank portfolios have been getting worse each passing month. "Persistent downward pressure on valuations of residential mortgage assets are being compounded by falling valuations of commercial real estate and other assets," says Brian Bethune at IHS Global Insight.
Any bank with similar toxic assets in their portfolio now has a chance to ask the government for similar cover. "Bank of America (BAC) can use this template to reduce the risk on Merrill's (MER) portfolio before they close the deal," says Cassandra Toroian, chief investment officer at Bell Rock Capital. BofA declined comment.
For the government, this is a way to stretch the fast-dwindling cash available from the $700 billion bailout fund. "It enables the government to leverage taxpayers' money better," says Keith Davis, financial analyst at Farr Miller & Washington. "This way, you can avoid buying up bad assets, and hopefully not have to bear losses unless the situation worsens."
For the banks, analysts say, this could calm investors by putting a floor on losses from the bad assets. Also, it's like an insurance policy, which the banks might never need to access, Bethune says.
This marked another reversal for the government, which two weeks ago said it would not take any action related to toxic assets, as it had planned, and instead would invest directly in the banks. That news sent financial stocks tumbling. Citi was especially hard hit, falling 60% to $3.77 last week, prompting the bank to ask for more federal help. Now, "If the investors start to go after Goldman (Sachs) (GS) or Morgan Stanley, (MS) you can see them, too, ask for similar government guarantees," Davis says. Goldman and Morgan declined comment.
Image by imageining via FlickrBloomberg.com: Exclusive: Nov. 24 -- "The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis."
The important thing to note at this time is that the $700B TARP bailout is just the tip of the iceberg. Keep an eye on this story updates. The writers, Bloomberg's Mark Pittman and Bob Ivry, seem to have a good feel for these complex issues.
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