US steps in to save Citi, Obama eyes tax relief

The US government agreed to prop up troubled number two bank Citigroup with more than $300-billion, the latest bailout in a sector crippled by exposure to toxic mortgage debts and a crumbling economy.

With problems spreading beyond the banks, governments around the world have been stepping up their efforts to contain the worst financial crisis in 80 years.

Aides said US president-elect Barack Obama was also considering delaying a campaign promise to roll back tax cuts on high-income Americans, while the British government was set to announce a stimulus package including temporary tax cuts.

Asian equity markets trimmed losses, while European and US stock futures rose after the US Treasury announced plans aimed at preventing Citigroup going the way of smaller rivals such as Lehman Brothers and Wachovia.

”The move will help the markets not implode today. It’s another one of a series of moves where the US government and the Fed do whatever they can from preventing the financial system to fall over,” said Rory Robertson, interest rate strategist at Macquarie in Sydney.

”It’s all good stuff but the fact that the Fed has to bail out one of the biggest banks in the world is not exactly a vote of confidence.”

The plan calls for Citigroup issue $27-billion in preferred shares to the US Treasury and the Federal Deposit Insurance Corporation.

The Fed, Treasury and FDIC in return will shoulder most of the potential losses on Citigroup’s $306-billion portfolio of debt assets, beyond an initial $29-billion in losses which the Citigroup would be responsible for.

”The US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,” the Federal Reserve, the Treasury Department and FDIC said in a joint statement.

Widespread response
Citigroup, which saw its shares slump 60% last week, wasn’t the only bank having to raise more funds.

Asian-focused UK bank Standard Chartered said it planned a $2,7-billion rights issue to boost its capital reserves, while other banks were also reported to be likely to raise money.

With problems spreading beyond banks, policymakers were readying further measures to stabilise the ailing global economy.

In South Korea, the central bank said it would put up to $3,4-billion into a proposed $7-billion fund to buy bonds from cash-strapped companies and commercial banks.

And members of the 21 nation Asia-Pacific Economic Cooperation (Apec) forum pledged to take quick and decisive action to help the global economy.

But a deputy governor at China’s central bank said interest rates were at a ”relatively appropriate” level, hosing down speculation for more immediate monetary stimulus which had been swirling late last week.

Signs that Obama would consider holding off tax hikes for the rich, a key policy plank in his election campaign, marked a significant shift.

Business leaders and economists had expressed concern that raising taxes on the higher paid now would only exacerbate the economy’s woes.

When asked if the tax cuts for the wealthy would be allowed to expire on schedule after 2010 rather than be rolled back earlier, senior Obama adviser David Axelrod told Fox news channel: ”Those considerations will be made.”

Another adviser, Bill Daley, said on NBC’s Meet the Press that the 2010 scenario ”looks more likely than not”.

Obama, who will take over from Bush on January 20, is ready to announce his top economic team on Monday, holding a news conference at 11am (5pm GMT) in Chicago.

He plans to nominate Timothy Geithner, president of the New York Federal Reserve Bank, as Treasury secretary, a transition official said. Lawrence Summers (53) who was Treasury secretary in the Clinton administration, will help shape policy as director of the White House National Economic Council, the official said.

The potential size of the latest US stimulus plan appears to be growing from the $100-billion to $300-billion previously suggested by congressional leaders.

One influential Democrat, Senator Charles Schumer of New York, said on Sunday that a package of up to $700-billion was needed to support the American economy.

UK stimulus package
In Britain, Prime Minister Gordon Brown and his finance minister, Alistair Darling, are expected to announce a package totalling up to £20-billion ($30-billion), by cutting sales tax and offering help for businesses, low earners and struggling home owners.

They will also announce plans to plug the hole in state finances by raising taxes in future, including a political shift in the form of a sharp rise in income tax for high earners, media reports said.

”I don’t see this as a gamble. I see this as necessary, responsible action,” Brown told the BBC.

The British economy will shrink by 1,5% next year, and for a total six quarters in a row, according to a forecast from the National Institute of Social and Economic Research.

Britain has already poured billions of pounds into supporting banks crippled by their exposure to bad mortgages and derivative products related to them.

Financial firms around the world are still having to find additional capital to shore up their shakey balance sheets.

In addition to Standard Chartered, UBS, Anglo-Irish Bank and Nomura Holdings were also seeking or likely to need more funds, according to media reports over the weekend.

Swiss bank UBS is likely to need another injection of funds from the state after the company’s shares fell almost 50% this month, a top Swiss bank regulator told SonntagsZeitung newspaper on Sunday.

Anglo-Irish Bank has secured commitments to raise over €1-billion ($1,25-billion) in capital in a bid to shore up funds and stave off pressure to merge, the Sunday Times reported.

And Nomura Holdings, Japan’s largest broker, plans to raise several billion dollars to replenish a capital base depleted by the financial crisis and its acquisition of parts of failed Lehman, according to a report from Japanese broadcaster NHK. – Reuters

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