What signs are there behind the rescue of Citigroup?

If instead of buying one share of Citigroup (NYSE: C), the second U.S. bank by assets, on December 29, 2006 would have saved the money, yesterday could have bought 9 shares for the value of one on that date. That is, Citigroup's shares rallied strongly during the day yesterday at the news of support by the U.S. government to prevent the collapse of the entity. In fact, the stock value of Citibank at the end of 2006 in Friday's session could purchase 15 shares in the company of such value. As we are accustomed, the crisis gives us no respite even on weekends. In addition to the bailout by the government of one of the leading financial institutions in the country, unveiled three new bankruptcies of financial institutions in the U.S. To get Citigroup's collapse, the U.S. government announced a plan to help the financial institution that includes a guarantee of more than U.S. $ 300,000 million (the government guarantee of assets for 10 years residential and commercial, for 5 years) and the capital injection of U.S. $ 20,000 million (which could even be higher).

This means that if the U.S. government has to come to the rescue of high risk which owns Citibank, would be using almost 50% of the contracted volume to purchase toxic assets the U.S. financial system. "With these transactions, the U.S. government are taking steps to strengthen the financial system and protecting taxpayers and the economy? could read the statement from the Federal Reserve. Honestly if I were a taxpayer in the U.S. economy, I would not protect me from using my money. During the hectic weekend that just passed, three institutions went bankrupt: the PFF Bank & Trust of Pomona in California, the Community Bank of Loganville, in the state of Georgia and the savings Downey Savings & Loan , also from California, which has assets of U.S. $ 12,800 million. The latter represented a significant blow to the U.S. financial system.

Why is the U.S. government to bail out Citigroup? The first thing to say is that Citibank had not opened yesterday but for financial assistance received from the U.S. government. For the U.S. government, so key and get the economy recovers, what is to prevent new episodes of crisis in the financial system size. The fall of Citigroup would have meant the collapse of the financial system and the deepening of the crisis on the real economy, which would have also extended the duration of the economic downturn. This is due not only to the entity that has the size but also the multiplicity of interconnections that has the same within the financial system. What happened with Citigroup has raised fears about the possibility that other large institutions are going through similar situations. That is why to create calm in the markets, President George Bush announced that he is willing to apply similar measures to safeguard the U.S. financial system. Bush said in his statement: "Maybe we make these choices again in the future?. Not that the rescue to ensure that the economic prospects of the United States would be better from it, but avoids a major problem.

The U.S. government's strategy to exit the current crisis is primarily to contain the financial system difficulties, then advanced in the second step is to stimulate the economy so you can start your recovery. Within this strategy, over time help financial institutions to be cleaning up their balance sheets, although in this way is very important for government intervention to avoid difficulties by borrowers, as it would end up worsening the situation . These events stress, not positive in terms of prospects for U.S. economic recovery and damaging private sector expectations. In this sense, the influence of President-elect Barack Obama can play a key role. These days, Obama announced the development of an economic stimulus plan, Keynesian-style, two years which aims to create 2.5 million jobs. In yesterday, Obama introduced his economic team of leading economists in which the current president of the New York Fed, Timothy Geithner, will serve as his treasury secretary and former Treasury Secretary Lawrence Summers will serve Economic Council director.

The announcement while it has no concrete and perceptible impact on the economic situation, it does serve much to improve the mood as it generates greater confidence about the ability of the new management to cope with the crisis to overcome. How will all after the rescue of Citigroup? There is a clear message by the U.S. government (both in management and in the incoming outgoing) is that there is full commitment to make the greatest efforts to sustain the U.S. financial system and revive the economy achieve. Fortunately, the profile that shows Obama is attempting to order the government's fiscal accounts, which would ensure that once passed the greater turbulence in the U.S. economy, would lead to a medium-term action to reduce the fiscal deficit. This would avoid any waste of public resources generated by this crisis, are being transformed into a new crisis in the future. We will meet again tomorrow, Horacio Pozzo