Ireland Financial News – Mortgages & Banking

The US government has agreed to a $306bn (€244bn) rescue plan for Citigroup in the latest attempt to bolster a financial services industry in turmoil.

Citigroup’s package may also prove a template for other banks that are expected to face growing losses as economies worldwide sink into recession.

Credit losses once concentrated in mortgages are already bleeding into new, large areas such as credit cards and commercial real estate.

  The nation’s second-largest bank by assets has the farthest international reach of any US bank, with operations in more than 100 countries.

Many analysts have said Citigroup might be too big to be allowed to fail, and that any collapse could cause financial havoc around the globe.

‘The market wants some kind of certainty about their losses,’ said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.

The plan announced late Sunday calls for Citigroup to obtain $27bn (€21.9bn) of capital by issuing preferred shares.

The shares carry an initial eight percent dividend, higher than the five percent it charges dozens of other lenders under its $700bn (€560bn) financial industry rescue package. Citigroup itself got $25bn (€20bn) in the earlier package.

Citigroup agreed to absorb the first $29bn (€23.2bn) of losses on the $306bn (€244bn) portfolio, plus 10% of additional losses, for a maximum total exposure of $56.7bn (€45bn).

The Treasury Department could end up absorbing $5bn (€4bn), the Federal Deposit Insurance Corp $10bn (€8bn), and the Federal Reserve the rest.

The bank will not have to make management changes, but agreed to tighter restrictions on executive pay, and to try to modify troubled mortgages in the $306bn (€244bn) portfolio.

It also cannot pay more than one cent per share in common stock dividends per quarter for three years without the Treasury Department’s consent. The quarterly dividend is now 16 US cents.

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

The plan was announced less than a week after Pandit announced plans to reduce Citigroup’s workforce to 300,000 by early next year from 375,000 at the end of 2007.

Citigroup employs over 2,200 people in Dublin’s IFSC and in Waterford.

The Minister for Finance, Brian Lenihan has said the Government has not ruled out public investment in Irish banks, but said banks had to demonstrate a capacity to attract private investment.

Speaking on RTE’s this week, Mr Lenihan said the State putting money into the banking system would be a last resort and it was entirely legitimate that the taxpayer should not be asked to capitalise banks.

He said he had received a Government commissioned report confirming there was no threat to the solvency of banks in Ireland and that they could meet the current regulatory capital requirements.

Mr Lenihan also said he was not ruling out income tax increases over the next two years.

News from RTE >>

Official figures show that the annual rate of inflation fell back to 4% last month from 4.3% in September.

The Central Statistics Office said lower petrol and diesel prices and falls in the prices of clothes and footwear were the main factors in the fall.

The CSO said the October figures did not include rises in excise duties announced in the Budget, as they took effect after the figures were compiled.

Overall, prices fell by 0.2% compared with September.

There was a 2% fall in prices of clothes and footwear, while lower oil prices and air fares led to a 1.8% drop in transport costs.

Prices of furnishings and household equipment were also lower due to sales.

But education costs rose by 3.6% in the month, while there were also higher childcare costs and house insurance premiums.

News from RTE >>