US, Asian, and European Markets Skyrocket on Citigroup

The bailout plan for the banking giant Citigroup was announced early Monday morning which induced one of the largest surges in global markets since the crisis began. Following several extremely harsh days of declines, executives and government officials talked until the late hours of the night finalizing the terms of the deal.
According to a NYTimes article entitled: “Citigroup to Halt Dividend and Curb Pay,” the terms of the deal are as follows:
“Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.
Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the F.D.I.C. Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.
In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.”
In my opinion, those are extremely favorable deal terms for Citi, especially in light of the fact that other players (we can all think of examples) were denied bailouts by the federal government because they were not big enough to be a threat. As a titan of the financial world, with “$2 trillion in assets and operations in more than 100 countries,” Citi is the quintessential example of the ‘too big to fail’ philosophy.
Regardless, news that nearly a third of a trillion dollars worth of loans would be backed by the government, in addition to shouldering the majority of the losses, sent Citi shares skyrocketing over 50% on Monday. It lead the full banking sector in a steep rally which had the S&P500 up an astonishing 6.5%.
Another NYTimes article entitled: “Markets Surge for a Second Day; Dow Up Nearly 400,” illustrates the gravity of the rally: “In the last four trading days, the S.& P., a benchmark gauge of the market, has ricocheted across the same range — up and down 12 percent — that the index has in the past taken several years to cover. The combined gain on Friday and Monday in the S.& P. was the biggest since the recovery that followed the October 1987 crash.”
In response to the soaring US market, Asian and European markets jumped as well. Japan’s Nikkei was up nearly 4.25%, Hong Kong’s Hang Seng was up 4%, and China remained relatively constant. Europe posted astonishing gains as the UK’s FTSE 100 climbed 9.84%, the DAX Germany jumped 10.3%, and France’s CAC40 climbed 10%.
However, it begs the question, how much will the US shoulder? Between the $700B banking bailout, the new Citi bailout, and Obama’s call for a $500B stimulus package government-spending is skyrocketing with an already exorbitant $10 trillion of national debt. Clearly, a second move was needed over the weekend given the spiraling-out-of-control nature of the preceding trading, however will short-term stimulus packages really completely jumpstart a severely hurting economy? Personally, I think the government didn’t have a choice with the Citigroup bailout. Whether I like it or not, there is some truth to the fact that it was too big to fail. However, I think that the US’s national debt is already a major international issue, and adding hundreds of billions more to it is simply compounding an already difficult problem. Unfortunately, I think we are due for at least 18 months of a painful recession, and any artificial attempts to reduce that time or make it less agonizing – other than moves to ensure survival like Citi – will yield very few substantial results.
That being said, in the meantime we can still enjoy the upward turn in the world economy for the last few days, and take a look at the bright green Emerginvest World Heat Map.

http://blog.emerginvest.com/us-asian-and-european-markets-skyrocket-on-citigroup/