The New York Times, Los Angeles Times, and Wall Street Journal lead with the late-night announcement of a plan to rescue ailing banking giant Citigroup. Under a plan that the NYT describes as "radical" and "complex," the federal government will protect Citigroup from potential losses on a pool of troubled assets worth around $306 billion. On top of that, the Treasury Department will inject $20 billion into the company—in addition to the $25 billion the financial institution has already received from the department's Troubled Asset Relief Program. The LAT highlights that this is "the largest single rescue effort thus far in the current financial crisis."
The Washington Postoff-leads the Citigroup rescue but leads with word that President-elect Barack Obama and Democratic leaders are considering a huge fiscal stimulus plan that could total $700 billion over the next two years. Transition officials aren't confirming that something of that magnitude is being considered, but more Democrats are raising it as a possibility. USA Today leads with a look at how those who will be flying over the Thanksgiving holiday have a better chance of making it to their destination on time this year. Efforts to decrease congestion at New York airports coupled with the schedule cutbacks by financially struggling airlines have cut down on traffic and have decreased delays.
After Citigroup's stock plunged about 60 percent last week when it became engulfed in a crisis of confidence, executives and federal officials began intense negotiations to try to prevent the problem from spreading to other big banks. "This time … the company in jeopardy is truly gigantic," notes the WP. Citigroup is the largest U.S. bank by assets. It is involved in so many aspects of the financial system—and in more than 100 countries—that it seems to fit the very definition of "too big to fail."
Under the plan, the government will protect Citigroup from losses on a $306 billion portfolio of assets mostly made up of loans and securities that are backed by residential and commercial real estate. Citigroup will be responsible for covering the first $29 billion in losses. (The LAT says $36 billion, because, it specifies, the $29 billion would be on top of approximately $7 billion already in a rainy-day fund.) After that threshold has been reached, the Treasury Department, the Federal Deposit Insurance Corp., and the Federal Reserve will absorb 90 percent of any further losses.
For its trouble, the government will receive $7 billion in preferred shares—on top of the $20 billion of preferred stock it will get for its additional cash infusion. The government didn't mandate any changes to the company's leadership, but the banking giant did agree to grant the government power over its operations. The LAT notes that the government can now "effectively prohibit stock dividends for the next three years" and everyone says Citigroup had to accept limits on executive compensation and agree to implement a plan to modify mortgages to avoid foreclosures.
Of course, no one knows whether it will be successful. The NYT highlights that this will be the "government's third effort in three months" to stabilize the markets and could be used as a precedent to rescue other financial firms. To recap: First, the government said it would buy troubled assets, then scrapped that plan in favor of injecting money into financial institutions. Now it's made it clear that it's ready to try a mixture of the two for certain institutions. The previous efforts led to a bit of optimism in Wall Street, but that optimism has always proved short-lived. The WSJ points out that the portfolio involved in this rescue is really only a drop in the bucket for a company that has $3 trillion in assets, including $667 billion in mortgage-related securities alone.
In a separate piece inside, the NYT points out that this new plan "raises about as many questions as it answers," particularly if it's seen as a model for an industrywide rescue. How does the government decide which assets to include? How would potential losses be calculated? Has it even considered all the assets that could lead to losses in the future? Even if this helps the market as a whole, there's no guarantee that it will pervent problems in financial institutions further down the road.
It's unclear how influential President-elect Barack Obama's pick for Treasury secretary, Timothy Geithner, was in the weekend's negotiations. The WP and LAT both say that as president of the Federal Reserve Bank of New York, Geithner was involved and kept Obama updated. The NYT agrees Geithner was critical to the negotiations on Friday, but says he backed away a bit after news began circulating that he would be appointed.
The WP adds a little historical gem by pointing out that Citi's origins can be traced back to a firm called First National City Bank that, in the 1920s, repackaged and sold bad loans from Latin America and billed them as safe securities. After the scheme collapsed, it became Citibank. Decades later, repackaging bad loans as safe securities is at least part of the reason why Citigroup is suffering so much heartache. Curious about how Citigroup got into the predicament it's in today? If so, be sure to read yesterday's detailed NYT piecethat explains how the company went from being worth $244 billion two years ago to $20.5 billion today. The story is particularly interesting, considering that Robert Rubin, Treasury secretary under President Clinton and an economic adviser in Obama's transition team, plays a starring role in the saga.
Speaking of Rubin, the NYT takes a look at how Obama is creating "a virtual Rubin constellation" in his economic team. Obama's three top economic advisers "are past protégés" of Rubin, who also has ties to other members of the president-elect's transition team. But even though the three advisers once shared Rubin's formula of favoring balanced budgets, free trade, and financial deregulation that was so popular in the 1990s, they all recognize that times have changed. They're now following Obama as he promises to increase regulation and plans to take the country deeper into debt.