Business

WASHINGTON (CBS) ― The U.S. government unveiled a $20 billion rescue plan on Sunday for troubled banking giant Citigroup, once the country's biggest and strongest financial institution.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. after a weekend of tense negotiations, is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already-crippled financial system and the U.S. economy.

In addition to an investment of $20 billion in Citigroup, the government plan also guarantees up to $306 billion in risky loans. This is on top of the $25 billion the government has already pumped into Citigroup.

President Bush argued Monday that the government's dramatic rescue of Citigroup was necessary to "safeguard the financial system" and help the economy recover, and he said there could be more such moves if other institutions need help.

Bush said he approved the action, recommended by Treasury Secretary Henry Paulson, while flying back to Washington on Sunday evening from meetings in Peru with Pacific Rim leaders. He said he also spoke with President-elect Barack Obama on Sunday night, part of what he has promised will be "close cooperation" between his administration and the Obama camp.

Referring to the Citigroup rescue, Bush said, "We have made these kind of decisions in the past. We made one last night. And if need be we will make these kind of decisions to safeguard our financial system in the future."

He spoke after meeting with Paulson and other Cabinet members at the Treasury Department, and said they all realize that Americans are concerned for their jobs and savings.

"We will safeguard the financial system as the first step necessary for economic recovery," the president said. "This is a tough situation. But we will recover from it."

Citigroup has more than $2 trillion in assets and operates in 100 countries but it was another company that made, in retrospect, awful mortgage-related investments, notes CBS News correspondent Jeff Glor. Citi's stock price has been ravaged this year - down 87 percent, from $29.44 at the end of 2007 to $3.77 as of now, and in the end there was little choice but for the government to step in.

"If Citigroup had not been bailed out, then the whole financial system could collapse," said Princeton economics professor Paul Krugman on CBS' The Early Show.

But is the government bailout of Citigroup well-structured, and are taxpayers getting a fair deal here?

Krugman, author of "The Return of Depression Economics and the Crisis of 2008" (Norton), says on first read, no.

"Most of the people who have looked at it, the small hours of this morning, have said this is a lot of taxpayer risk in return for not much," Krugman told co-anchor Maggie Rodriguez.

"It looks like a very sweet deal for Citigroup management, very sweet deal for Citigroup shareholders, to the extent they have anything left - not very good for the taxpayer. This was not good."

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 Inc. 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. Money from the $700 billion bailout and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The agreement also places restrictions on executive compensation, including bonuses.

With other bailouts seemingly having done nothing to boost consumer confidence, Rodriguez asked, why do it if it is not well-structured?

"Well, you know, things could be worse, you know? That's been the moral of this crisis: things can always be worse,' Krugman said, "and they have been getting worse.

"Things could be much worse than they are. It's what hasn't happened, not what has, is the justification. We had to do this, but we should have done it better."

Overseas Markets, Wall Street Respond

Wall Street showed relief early Monday over the government's plan to bail out Citigroup - a move it hopes will help address some of the uncertainty hounding the financial sector. Stock index futures contracts indicated the market was poised to extend a sharp rally from Friday.

Investors also cheered the idea that the government could introduce another economic stimulus plan. President-elect Obama is set to introduce his economic team on Monday, which is key to putting into place a huge economic recovery plan that targets saving or creating 2.5 million jobs during the next two years.

Krugman said that the announcement that Obama has picked New York Federal Reserve president Tim Geithner as his Treasury Secretary and Lawrence Summers to head the White House National Economic Council (whom he described as "terrifically smart and terrifically forceful guys") is good news.

"Great to have the best people on board," Krugman told Rodriguez. "This is the one thing really encouraging right now."

Dow Jones industrial average futures rose 147, or 1.83 percent, to 8,183. Standard & Poor's 500 index futures rose 22.40, or 2.83 percent, to 814.40. Nasdaq 100 index futures rose 22.50, or 2.06 percent, to 1,113.50.

European stock markets rose on Monday. The FTSE 100 index of leading British shares was up 174.98 points, or 4.6 percent, at 3,955.95, while Germany's DAX was 162.51, or 3.9 percent, higher at 4,289.92.

Asian markets were mixed on Monday, with Hong Kong stocks dropping despite claims by world leaders at the Asia Pacific Economic Co-operation (APEC) forum that the global financial crisis could be over in 18 months.

The benchmark Hang Seng Index was down 419.71 points, more than three per cent, to 12,239.49, at market opening before recovering slightly to finish the session down 156 points.

Asia breathed a little easier after the U.S. government cast a lifeline to Citigroup, averting what many believed would have been a catastrophe for the global financial system.

Yet shares of financial companies dropped across the region as the bailout, widely expected by investors given Citigroup's size and scope, highlighted persistent worries about the problems facing the banking sector.

Critics said the bailout creates a moral hazard that will eventually backfire because it effectively rewards the bank for taking unacceptable business risks.

"This challenges the existing rules in the industry and might affect the fairness of competition," said Yu Xiaoyi, chief researcher for Guangfa Securities, in the Chinese southern city of Guangzhou. "This should be a lesson for China's own banks about risk controls."

But many welcomed the deal as saving the global financial system, already stricken by the year-old credit crunch that originated from a mountain of toxic mortgages in the U.S., from further mayhem.

"If they didn't help, the damage would be beyond imagination," said Teck-Kin Suan, economist at United Overseas Bank in Singapore. "The scale is so much larger than Lehman Brothers," the storied Wall Street investment bank that filed for Chapter 11 bankruptcy protection in September after the U.S. government refused to rescue it.

"One thing that makes this time particularly difficult is that the financial system is broken," Mark Zandi of Moody's economy.com told CBS News."It's now increasingly difficult to get credit, whether you are someone with a good credit score or a business with a pristine balance sheet. That's going to make this particular recession, particularly severe."

Some are hoping this week at least will be somewhat calm, because there are not a lot of big economic numbers being released, and it's a short trading week because of the Thanksgiving holiday.

Meanwhile, Citigroup Hires … In The Philippines

Citigroup may be cutting jobs worldwide, but it is hiring more workers in the Philippines, where it plans to establish a regional hub for its call centers, company officials said Monday.

"Citi is repositioning in Asia Pacific but we remain focused on growth," country business manager Mark Jones said in a statement.

"As we review our operations and see where we can be more efficient, something which we have been doing even before the downtrend in the global financial markets, we in the Philippines are optimistic that instead of reducing headcount, we will be growing," he added.

He did not elaborate on the number of expected new jobs to be created. Citigroup currently more than 4,000 employees in the Philippines. The planned additional call centers mostly deal with overseas customers.

The Philippine Daily Inquirer quoted Jones as saying the company would likely hire 1,000 more people in the coming year. This could not immediately be confirmed independently.

Last week, Citigroup Chief Executive Vikram Pandit announced 50,000 additional job cuts on top of 22,000 cuts previously announced.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)