US Financial bailout may top $1 trillion

The Obama administration said Tuesday its new plan for rescuing America's crippled banking and financial sectors could top $1 trillion in a complex formula of cash infusions from government and the private sector.

Treasury Secretary Timothy Geithner revealed the massive rescue effort just hours after President Barack Obama said at his first White House news conference that Congress risked turning ``a crisis into a catastrophe'' if it fails to approve a separate $800-plus billion economic stimulus program. The plan has faced stiff opposition from Republican lawmakers.

The new financial bailout plan brought forward by Geithner grows out of a $700 billion rescue program put in place in October, under the Bush administration, as the depth of the country's critical financial sector troubles surfaced with a collapse of the housing market.

``Right now critical parts of our financial system are damaged,'' Geithner said in unveiling the new plan. ``Instead of catalyzing recovery, the financial system is working against recovery and that's the dangerous dynamic we need to change.''

Half of the bailout money was allocated by former President George W. Bush's administration, but that spending has come under heavy criticism for a lack of transparency and the failure of banks to put the money into the frozen credit market.

The second half of the $700 billion is now in the hands of the Obama administration, which plans to greatly expand the effort to unclog credit markets that provide loans to consumers and businesses. Funding for this effort would see a huge increase from $20 billion up to $100 billion, according to administration officials.

If a total of $100 billion from the bailout fund was used, it would be enough to support an additional $1 trillion in lending support through a Federal Reserve program that was announced in November but has yet to begin operations.

The administration also announced that the program would be expanded beyond consumer and small business loans to provide aid to the troubled commercial real estate sector.

The administration also announced a program to create a partnership between the government and the private sector to get private investors to buy bad assets that are currently weighing down the balance sheets of banks. Congressional aides who were briefed on this plan said that Treasury officials said it could involve between $250 billion and $500 billion in government support.

As Geithner put forward the new bailout package, the Senate, despite nearly unanimous Republican opposition, was expected to approve a $838 billion stimulus bill later Tuesday. Senate approval would set the stage for possibly contentious negotiations with the House on a final compromise on legislation. Congressional leaders hope to get the bill to Obama's desk in a few days.

Obama defended the stimulus plan in his press conference Monday night, saying the federal government ``is the only entity left with the resources to jolt our economy back to life.''

``The plan is not perfect,'' the president said. ``No plan is. I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans.''

Obama goes to Fort Myers, Florida, a metropolitan area among the hardest-hit by mortgage foreclosures, for another town-hall meeting Tuesday like the one he held Monday in Elkhart, Indiana, to promote his economic plan.

Just three weeks after his inauguration was celebrated jubilantly around the world, Obama has run into the jarring difficulties of governing. He failed to win over the Republicans he courted for his economic plan. Some of his supporters have wondered if he has yielded too much ground in the pursuit of bipartisanship.

Yet Obama's approval ratings remain high — 67 per cent according to a Gallup Organization poll released Monday. He is trying to tap into that popularity to win public and congressional support for his economic recovery plan as the country faces its worst economic crisis in 80 years.

``This is not your ordinary, run-of-the-mill recession,'' Obama said in his address Monday night, issuing a dire warning of the consequences if Congress fails to agree on a stimulus package. He cited Japan's failure to take bold actions in time to reverse a recession that turned the 1990s into a ``lost decade'' with no economic growth.

Despite painting a dire picture of the American economy, Obama said the US could well be in better shape by next year, as measured by increased hiring, lending, home values and other factors.

``If we get things right, then, starting next year, we can start seeing significant improvement,'' Obama said.

Agencies

General Motors calls on UK Govt to rescue it

General Motors, which employs 5,500 people around the UK, is in talks with the British government to secure cash to allow it to continue operating in what the car maker admits are "critical" conditions.

A report in The Telegraph says that the talks follow a decision by the US Congress to vote down a 14 billion dollar loan package to support the American automotive industry on Friday.

The future of British workers at GM plants in Luton and on Merseyside is unclear, as does that of up to a further 5,500 people employed by parts suppliers.

The Gordon Brown Government is likely to take a cautious approach to requests to bail out the UK car industry. It is thought more likely to consider offering bridging loans.

GM said it was "very disappointed" with the US loan package's failure, but continued to "look at options to restructure and stabilize the business in this exceptionally difficult economic period." It claimed to be operating "as usual".

The car maker, which owns brands including Vauxhall, Saab and Opel, said it was in talks with unions and European governments in countries where it has big operations to "provide liquidity for sustaining operations".

Underlining the urgency of the situation, GM said it would seek liquidity "while the US team pursues its options".

GM is also in talks with the German government, where it has Opel production facilities, in a bid to secure a credit guarantee.

The Swedish government yesterday announced a 28 billion Kronor support package to help the car industry. The plan offers credit guarantees, emergency loans and research funds to companies from Volvo to Saab.

Volvo is owned by Ford, which faces similar problems as does GM and Chrsyler.

According to The Telegraph, the Spanish region of Aragon, where GM has an Opel plant, has offered its own 200 million Euros credit guarantee.


Source; Agencies

U.S. Government may rescue Citigroup

The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank’s stock-market value in three days, according to investors and analysts.

Citigroup’s $2 trillion of assets dwarfs companies such as American International Group Inc. that got support from the U.S. government this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

One option is for the Federal Reserve and U.S. Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility, to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as $50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.

The arrangement allows the Fed to leverage the money provided by the Treasury with loans, enabling the purchase of assets worth a multiple of the money. Funding the purchases with loans makes them less onerous to the U.S. budget.

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