US agrees to $300bn Citigroup rescue aid

The US government agreed to prop up Citigroup with more than $300 billion (Dh1.1trillion)to avoid a collapse that could have wrought financial havoc around the globe.

The package could become a model for other US banks expected to face growing losses in a global economic crisis now bearing down on industry and jobs. Credit losses once concentrated in mortgages are spreading into areas such as credit cards and commercial real estate.

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

Rory Robertson, interest rate strategist at Macquarie in Sydney, said: "It is 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."

Citigroup has the farthest international reach of any US bank, with operations in more than 100 countries. The bank was widely perceived to be too big to be allowed to fail.

The plan calls for Citigroup, America's second-biggest bank, to issue $27bn in preferred shares to the US Treasury and the Federal Deposit Insurance Corp.

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

"The US administration 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.

Citigroup, which saw its shares slump 60 per cent last week, was not the only bank having to raise more funds.

The Big Three US automakers in Detroit are seeking support from a US government reluctant to be seen intervening to prop up an entire industry. Talks are being watched with keen interest in Europe where industry faces similar difficulties.

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.