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Government Announces Plan to Rescue Citi

Written by A Forex View From Afar on Tuesday, November 25, 2008

Citigroup is set to receive a lifeline from the U.S. government, in order to avoid bankruptcy. More than $300 billion worth of bad debt will be guaranteed by the Treasury in the coming months. In addition to the security package, the bank will receive a $20 billion cash infusion, totaling $55 billion received from the Treasury through the Troubled Asset Relief Program (TARP).

Last week, Citi’s shares plunge a record 60%, as the bank was trying to sell itself to avoid Chapter 11. Even though these rumors had never been confirmed, the bank fell to the lowest price in the last decade. Throughout this period, the bank’s officers and executives insisted the bank is very well capitalized and has strong reserves of liquid assets. Now, it seems that was not the case after all.

At the current share value, the bank’s market cap is around $20 billion, far less than the write-downs that would have resulted from the portfolio of $300 billion worth of bad debt.

The move to save another bank will probably have a positive effect on the equity markets, as it shows the government is not about to let another Lehman situation happen any time soon. However, futures traders have not yet reacted to the news release, as the S&P Futures are down by 15.70 points, currently.

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