£28 billion bailout by Citigroup's new chief

The move came two days after central banks announced an emergency $100 million package of cheap money in a bid to calm down the world's financial markets. But doubts are growing if that will be sufficient to halt the credit crisis.

The Citigroup bailout is the first move by new chief executive Vikram Pandit, the former Morgan Stanley hedge fund manager, appointed this week with a mandate to sort out billions of dollars of the bank's assets, which have slumped in value and are highly risky.

The fact Pandit has decided to move unilaterally now puts at risk an $80 billion US government plan to launch a super-SIV to bail out the American banking industry. Citi insisted it still supports the scheme, but analysts said there seemed to be little point in setting up a super-SIV that excluded its assets.

Citigroup invented SIVs (Structured Investment Vehicles) in 1998. They are complex funds of high-yielding, long-term assets such as mortgages, credit cards and debt that banks package together and fund by selling on shorter-term lower yielding notes and commercial paper.

Citigroup's SIVs originally had assets of £100 billion. But as the subprime crisis hit, the value of the underlying assets dived. Citi said last night that the value of the assets in the seven SIVs it has taken on to its own balance sheet had dwindled to $48 billion.

Credit rating agency Moody's cut Citigroup's ratings from the third-highest level to the fourth-highest, Aa3. It said this was because the bank's capital ratios are likely to remain low and it faces further writedowns. So far Citi-group has warned it faces writedowns of up to $11 billion in the fourth quarter after $6.5 billion in the third quarter.

Lower credit ratings are likely to make it more expensive for Citigroup to borrow money, hitting its profitability. That will lead to lower bonuses for its bankers. Morgan Stanley is today due to tell its workers that their bonuses for 2007 are below last year's. Payouts at rival Lehman Brothers yesterday are believed to have been disappointing.

London-based HSBC last month took SIVs worth $45 billion on to its own balance sheet while Standard Chartered absorbed about $46 billion worth. WestLB, Rabobank and Barclays have bailed out their SIVs.