Would Air India need government bail out package to pay salaries?

For the first time since the losses hit the national carrier Air India, the payment of salaries for the current month of about 30,000 employees will be delayed by a fortnight.

Confirming this, an Air India spokesperson said, "The salaries of June will be paid on July 15 due to the resource crunch that the company is facing."

The payment of productivity-linked incentive (PLI) has also been delayed by 15 days, according to a circular issued by Air India management.

Air India's losses for the last financial year are estimated at around Rs 4,000 crore, up from Rs 2,226 crore in the previous fiscal.

Reports say the national carrier was planning to seek Rs 5,000 crore as additional equity, Rs 7,000 crore as a soft loan payable after five years at a five per cent interest rate, and a grant of Rs 2,000 crore.

However, top Air India officials have denied the figures, but said they are working on similar lines.

Maintaining that the financial crisis was foreseen last year, industry sources said the acute situation could have been avoided had Air India delayed the ongoing deliveries of aircraft, like its competitors Jet Airways and Kingfisher Airlines did.

They said there is no capacity since air traffic had gone down substantially due to the financial meltdown, and so the induction of additional aircraft could have waited.

Air India has placed orders for 111 new planes worth over Rs 45,000 crore and it currently has a paid-up capital of Rs 145 crore and authorized capital of Rs 1,500 crore package would not match Air India's expectations.

Agencies

Will the $15b-loan bail out help US auto industry?

Facing massive job losses, the White House and congressional Democrats are working to provide about $15 billion in loans to prevent Detroit’s weakened auto industry from collapsing. After yielding to President George W Bush on a key point, House Speaker Nancy Pelosi said the House would consider legislation next week to provide “short-term and limited assistance” to the US auto industry while it undergoes “major restructuring.”

“Congress will insist that any legislation include rigorous and ongoing oversight to guarantee that taxpayers are protected and that resources are directed to ensure the longterm viability and competitiveness” of the industry, Pelosi said in a statement. The Senate is also scheduled to be in session next week. The legislation, which was being crafted this weekend, would act as a lifeline to General Motors Corporation, Ford Motor Co. and Chrysler LLC while meeting demands from many skeptical lawmakers that Congress refrain from writing a blank check for the beleaguered industry. Officials in both parties said a key breakthrough on the long-stalled bailout came when Pelosi bowed to Bush’s demand that the aid come from a fund set aside for the production of environmentally friendlier cars. The California Democrat spoke to White House chief of staff Josh Bolten during the day to signal her change in position, they added.

Pelosi said the billions of dollars that had been set aside to modernize plants to develop the green cars would be repaid “within a matter of weeks.” Democrats said her hope was to include the funds in an economic recovery bill that lawmakers are expected to prepare for President-elect Barack Obama’s signature shortly after he takes office. Officials in both parties also said the legislation would include creation of a trustee or group of industry overseers to make sure the bailout funds were used by automakers for their intended purpose. The funds are designed to last until March, giving the incoming Obama administration and the new Congress time to consider the issue anew.

A Democratic aide said Pelosi was seeking a provision that would bar the automakers from using any of the funds to pursue a legal challenge to states seeking to implement tougher auto emission standards. The aide spoke on condition of anonymity because the legislation was not yet drafted.

Source: Agencies

Will US govt bail out Bank of America next?

US government rescue plan has eased investors’ concerns about Citigroup, but mines lurking in the balance sheets of rivals including Bank of America still tempt shortsellers. Bank of America, the No 3 US bank by assets, has loaded up on mortgages as the world’s largest economy wrestles with the worst housing market since the Great Depression.

The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial, the largest US independent mortgage lender and agreeing to buy Merrill Lynch, which owns the world’s largest retail brokerage.

If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.
“I would expect there are more banks who are in dire straits and more who can expect to be helped,” said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, DC. “The share price makes it look like Bank of America might be next in line,” he said.

Before Monday’s stock market rally, Bank of America shares had lost 52% in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup. Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks’ expectations, Bank of America would have a Tier-1 capital ratio of 7.15%.

The minimum that regulators seek to consider a bank “well capitalized” is 6%, but any ratio near or below 7% tends to spook investors. Bank of America declined comment. CreditSights also expressed concern about Wells Fargo, which it said would have a Tier-1 capital ratio of 6.98% under its worst case scenario. Wells Fargo recently agreed to buy Wachovia.

Under the same assumptions, and before the government’s latest investment, Citigroup would have a Tier-1 capital ratio of 8.64%.

American Express CEO for Citi Bank?
Vikram pandit may thank the TINA (there is no alternative) factor for still being in job as Citigroup CEO, as the US government reportedly did not push for his ouster in its rescue package. A day after the mega rescue plan, it has now come out that the authorities discussed whether to replace Pandit as Citi CEO, but there was an disagreement over the issue. A report from a US business daily has said that the name of American Express CEO Kenneth Chenault had emerged as a possible replacement.

Source: Reuters

US govt bails out Citigroup, but will it survive?

“Amazing how much damage the lame ducks can do in the time remaining.” — Paul Krugman, Noble Prize Winner in Economics, on the bailout of Citigroup by the incumbent US government
America’s cup of woes is spilling over, rather messily, with its long-venerated financial institutions suddenly faced with obliteration and forced to seek a bailout.

Citigroup, the latest in a list getting longer, has just been promised a $20 billion cash injection, besides a whopping government guarantee for its troubled assets and mortgages.
As its stock price fell 60% over last week, the world’s largest financial services firm with revenues of around $159 billion last year, kept repeating over and over that it had “very strong capital.”

US govt agrees to $306-b rescue plan for Citigroup
It took just one weekend for it to go from very strong to very weak, necessitating a bailout of this order.

On Friday, the stock tumbled by over 60% to $3.77, down from a peak of $56 in 2006.
Predictably, the bailout news did it some good on Monday. At the time of writing this piece, the stock had gained around 61% to $6.08 on the New York Stock Exchange.

Barclays gets $10 b as Citi rescue resounds
DNA Money attempts an overview of the situation, the intervention and its implications near and far.

What’s the rescue all about?
The US government has decided to guarantee $306 billion of troubled mortgages and other assets of Citigroup. The Treasury department will also inject $20 billion of cash into the firm.
This will be over and above the $25 billion Citigroup got under the Troubled Asset Relief Programme (TARP, as the $700 billion bailout package is officially named).

On its part, the firm will issue preferred shares worth $27 billion to the government and pay a dividend of 8% a year.

Analysts following the firm have been expecting this move. “While the conventional wisdom says Citi is too big to fail, the reality is it’s too big to manage,” wrote Vernon Hill, founder and former chairman, president, and chief executive officer of Commerce Bancorp on www. seekingalpha.com a couple of days back.

“As a result, the company has become a publicly traded incarnation of Murphy’s Law: anything that can go wrong almost certainly will — and probably sooner rather than later. And $25 billion in TARP money isn’t going to do much to turn things around.”

What will be the cost of the bailout?
Citibank will have to pay a dividend of $2.16 billion per year to the government on the preferred shares. It will also have to pay $1.25 billion @5% on the $25 billion it received through TARP. This means the bank will have to make a profit of more than $3.41 billion before the shareholders can take home anything.

Citigroup shareholders will be diluted in the “near term by the cost of the incremental preferred stock,” Morgan Stanley analysts Betsy Graseck and Cheryl Pate wrote in a report on Monday.

Who will absorb the losses?
Citigroup will have to absorb the losses to the extent of $29 billion, including the reserves. Beyond that, any losses will be shared between the government and Citi. The government, through its three agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp — will take on 90% of the losses, leaving 10% for Citi to bear.

What are the conditions associated with the bailout?
Under the terms of the deal, the institution has been prohibited from paying common stock dividends of more than $.01 per share per quarter, for the next three years, without the approval of the US government. Further, any executive compensation plan including bonuses to employees must get the approval of the US government.

But experts aren’t happy with this move. Robert Reich, a former labour secretary of the US government under Bill Clinton wrote on his blog : “This is not a particularly good deal for American taxpayers, but it is a marvellous deal for Citi… The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well.”

Ironically, the same executives who got Citi into the mess in the first place, continue.

Who was responsible for the mess?
Like other banks and financial institutions in the US, Citigroup also got carried away while investing in sub-prime mortgages. Also, its risk management system had stopped working.
New York Times said in a report said that Charles O Prince III, Citigroup’s chief executive before Vikram Pandit took over, learnt for the first time in September 2007 that the bank owed $43 billion in mortgage related assets. At that point, Prince asked Thomas G Maheras who oversaw trading at the bank if things were okay.

Maheras replied in the positive, then and every time the question cropped up. By the time the risk management team of the bank got around to assessing the risk related to these mortgages, it was too late. The bank had to announce billions of dollars in losses.

Analysts are even questioning the business model of Citigroup. They feel the company had spread itself too thin. “The whole idea behind Citigroup was flawed from the start. Unbeatable scale in financial services? Forget it. We now see the good Citi’s size has done for investors: the company has an incoherent, unworkable business model. It is run by a senior management team that’s largely unproven, with scant experience, operating a large financial institution,” wrote Hill.
Will the bailout and the guarantee be enough?
This is a tricky question. Citigroup has assets worth nearly $2 trillion on its books. It also has nearly $1.23 trillion in off-balance sheet assets.
“The roughly $300 billion pool of assets that are included in the rescue plan represent only a sliver of the company’s more than $3 trillion in assets, including its holdings in off-balance-sheet entities. Jitters about such “hidden” assets helped trigger the nose-dive in Citigroup’s stock last week. Among the off-balance-sheet assets are $667 billion in mortgage-related securities,” the Wall Street Journal reported.

Also, the troubled assets are not being taken off Citigroup’s balance sheet, and this has not gone down well with analysts.

What next?
Analysts are sceptical of the bailout.
“No one knows who’s going to lead it, over the medium term; hell, nobody knows who’s going to own it, over the medium term. The US government might have guaranteed a chunk of Citi’s assets, but it’s done nothing about Citi’s liabilities, including hundreds of billions of dollars in unguaranteed deposits,” Felix Salmon, a widely followed analyst in the US wrote on www.seekingalpha.com.

“Nothing in today’s announcement makes Citi immune to a bank run, which means there’s a very good chance the stock will remain under significant pressure. Given that it was the tumbling stock price which was responsible for this deal in the first place, one wonders if there was any point to this exercise at all,” Salmon wrote.

Analysts also feel that after the Citi bailout, it will be very difficult for the US government not to bail out the likes of General Motors, where so much more is at stake.

Source: DNA Money

Troubled banking giant Citigroup gets bail out

The US government will inject $20 billion into troubled banking giant Citigroup and will provide a guarantee of $306 billion to the financial firm.

"The US government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital," the Federal Reserve said in a statement.

As per the rescue plan, the treasury would invest $ 20 billion in Citigroup from the Troubled Asset Relief Programme in exchange for preferred stock.

Besides, the Treasury and the Federal Deposit Insurance Corporation (FDIC) would provide protection against $ 306 billion of toxic loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet, the statement added.

"As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan," the release said.

The move comes close on the heels of the sliding 60 per cent fall in the share price of Citigroup last week.

"Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program," the Federal Reserve added.

The Federal Reserve asserted that "we will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks."

Once the world's most valued bank Citigroup, headed by NRI banker Vikram Pandit whose own job is reportedly under attack, had over 3,75,000 employees at the end of last year and it aims to trim it down to below three lakh, as part of efforts to cut costs and help the crisis-ridden bank return to normalcy.

Close to 25,000 jobs have already been axed so far this year.

The financial crisis, that began 15 months ago, is now taking toll and recent months have seen government taking over quasi-public mortgage firms Fannie Mae and Freddie Mae, bankruptcy of Lehman Brothers, sale of Merrill Lynch, rescue of American International Group among others.

Spammers cash in on financial crisis

While experts predict potential losses of $2.8 trillion as a result of the world financial crisis, the spamming industry could end October on profit

The worldwide financial crisis sparked an increase in spam production following the collapse of some big names in global banking, says BitDefender researchers. As the world's stock markets crashed, spammers deployed a number of scams promoting services that claimed to eliminate or leverage debts, mortgages, and other fiscal or loan obligations.

For example, a large spam wave targeting US residents advertised the services of a company that allegedly offered to help stop home foreclosures. The message speculated the latest bailout plan announced by the US president.

Based on a template used before the recession, additional spam campaigns featuring financial ads gained significant volume during the month of October. Usually limited to a single body or subject line, the messages direct users through web links to various web sites, most of which were pushing phishing schemes.

Other spam waves used the economic crisis as a simple decoy for advertising drugs, pirated software or replicas. Finally, one of the most recent spam attempts relied on a multiple combination of automatically generated and distributed junk e-mails and social networking profiles directing the targeted recipients to web sites where they can "leave debt behind."
Vlad Valceanu, head, BitDefender's Antispam Research, said: "It is extremely important for computer users to be cautious about the emails they receive, as well as the advertisements they chose to click on. Spammers are using the current economic state and computer users' worries to their advantage by targeting spam campaigns towards those looking for not only more information about the recession but also those looking for how to better their current financial status."