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Wall Street Soars On Citigroup Bailout

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The Associated Press

The Tampa Tribune

Published: November 25, 2008

Wall Street barreled higher Monday for the second straight session, this time in a relief rally over the government's plan to bail out Citigroup - a move it hopes will help quiet some of the uncertainty hounding the financial sector and the overall economy. The Dow Jones industrials soared nearly 400 points and the major indexes all jumped more than 4.5 percent.

The surge gave the market its first two-day advance since Oct. 30-31 and the Dow's biggest two-day percentage gain since October 1987; the 891-point rise over the two sessions also wiped out an 872-point plunge over the course of Wednesday and Thursday.

Rushing to rescue Citigroup, the government agreed late Sunday to shoulder hundreds of billions of dollars in possible losses at the stricken bank and to plow a fresh $20 billion into the company.

Regulators hope the dramatic action will bolster badly shaken confidence in the once-mighty banking giant as well as the nation's financial system.

As part of the plan, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

Under the loss-sharing arrangement, Citigroup will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent.

Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners.

Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a failed savings and loan in California. Under the IndyMac plan, struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren't paying more than 38 percent of their pretax income on housing.

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