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Citigroup shares dived in pre-market trading on Friday after the bank confirmed that U.S. taxpayers would take on a bigger share of the bank as the U.S. government sought to bolster its capital.

Citigroup (nyse: C - news - people ) and the government have reached a deal to convert up to $25.0 billion in government-held preferred shares in the bank into common equity, the bank confirmed Friday. The deal would see the government's voting stake in Citigroup rise to as much as 36.0%, from the current level of 7.0%. This will be accompanied by an infusion of new members on the bank's board, giving it a majority of independent directors, the bank's chairman Richard Parsons said Friday.

Shares of Citigroup plunged 38.2%, or 94 cents, at $2.46, in pre-market trading Friday, suggesting investors feared further dilution of their shareholdings.

The Chinese government is stirring trade tensions with Washington with a plan to require foreign computer security technology to be submitted for government approval, in a move that might require suppliers to disclose business secrets.

Rules due to take effect May 1 require official certification of technology widely used to keep e-mail and company data networks secure. Beijing has yet to say how many secrets companies must disclose about such sensitive matters as how data-encryption systems work. But Washington complains the requirement might hinder imports in a market dominated by U.S. companies, and is pressing Beijing to scrap it.

"There are still opportunities to defuse this, but it is getting down to the wire," said Duncan Clark, managing director of BDA China Ltd., a Beijing technology consulting firm. "It affects trade. It's potentially really wide-scale."

Beijing tried earlier to force foreign companies to reveal how encryption systems work and has promoted its own standards for mobile phones and wireless encryption.

Those attempts and the new demand reflect Beijing's unease about letting the public keep secrets, and the government's efforts to use its regulatory system to help fledgling Chinese high-tech companies compete with global high-tech rivals. Yin Changlai, the head of a Chinese business group sanctioned by the government, has acknowledged that the rules are meant to help develop China's infant computer security industry by shielding companies from foreign rivals that he said control 70 percent of the market.

The computer security rules cover 13 types of hardware and software, including database and network security systems, secure routers, data backup and recovery systems and anti-spam and anti-hacking software. Such technology is enmeshed in products sold by Microsoft Corp. (nasdaq: MSFT - news - people ), Cisco Systems Inc. (nasdaq: CSCO - news - people ) and other industry giants.

Giving regulators the power to reject foreign technologies could help to promote sales of Chinese alternatives. But that might disrupt foreign manufacturing, research or data processing in China if companies have to switch technologies or move operations to other countries to avoid the controls. Requiring disclosure of technical details also might help Beijing read encrypted e-mail or create competing products.

Detroit automakers hoping for a government lifeline got it Friday night when Speaker of the House Nancy Pelosi said she would support a $15 billion loan from a fund already approved by Congress aimed at retooling factories to make fuel-efficient vehicles over the next several years.

Pelosi had been against the measure, bolstered by environmental advocacy groups. Opponents were concerned that automakers would use the money for normal operations and not deliver on requirements to develop vehicles that are at least 25% more fuel-efficient than the ones they market today.

But with job losses mounting in the U.S., many members of Congress are feeling pressure not to let the automakers go bankrupt even though most of their constituents do not favor a bailout for Detroit.

CASCADING BANKRUPTCIES POSSIBLE
Estimates are that if one automaker went into insolvency, it would cause a cascade of bankruptcies in the auto sector that could cost up to 3 million jobs. The U.S. lost more than 500,000 jobs in November alone.

The funds that would be tapped for the car companies were appropriated in the 2007 energy bill, and were meant to be disbursed by the Energy Dept. over time as each automaker qualified for the loans. "We will not permit any funds to be borrowed from the advanced technology program unless there is a guarantee that those funds will be replenished in a matter of weeks," said Pelosi (D-Calif.). How that would be accomplished is still under debate.

It was clear on Friday, after two days of hearings in front of the Senate Banking Committee and House Financial Committee, that Congress did not have the votes to appropriate new funding for a Detroit bailout, especially during a lame-duck session.

ENCOUNTERING "BAILOUT FATIGUE"
Over the last month, Congress, the public, and the media have been highly critical of the way the Treasury Dept. has overseen payouts to commercial and investment banks from the $700 billion Wall Street bailout package Congress passed in October. Representative Barney Frank (D-Mass.), chairman of the House Financial Services committee, said the public has "bailout fatigue."

Despite the intent of the package, which was to loosen lending to businesses and consumers, the credit markets remain tight. Banks have used the money for other functions, such as dividend payments, salaries, and even, in some cases, executive bonuses.

The automakers came to Washington asking for $34 billion, on top of the $25 billion loan package that was part of the energy bill. General Motors (GM) said it needed $4 billion by the end of the year to avert a financial meltdown, and Chrysler requested $7 billion, saying it would be at the minimum cash levels it needs to survive by the New Year. Chrysler on Friday retained a law-firm that specializes in Chapter 11 bankruptcy.

VOTE LIKELY THIS WEEK
Ford (F), in a better cash position, said it could likely weather the recession in 2009 without loans, though it asked for a $9 billion line of credit as an emergency fund. Executives with knowledge of the negotiations on Friday said Ford would probably not tap the loan money Congress is likely to approve next week.

Originally, Congress said it would meet Monday to vote on a bill if one came together. The vote will now take place later in the week, assuming the language of the bill is worked out to Pelosi's liking.

Chairman of the Senate Banking Committee Christopher Dodd (D-Conn.) has maintained that the Bush White House and Treasury have had the power to release funds from the $700 billion Wall Street fund. That assertion was backed up by the Federal Comptroller last week during hearings. But the White House has argued that the bill cant be interpreted to help automakers.

LONG-TERM RESTRUCTURING REQUIRED
Congressional Republicans have also signaled for a month that the only money they would vote to the automakers would be from the energy bill fund already appropriated.

The bill that Congress is expected to vote on next week is meant to give Congress time to work out a longer-term restructuring of the U.S. auto industry with the Obama Administration that will likely result in as much as $100 billion in loans being appropriated.

That money would come from either new legislation, or a combination of funding sources including the Wall Street bailout fund, $350 billion of which Obama's White House will administer. An auto industry "trustee" is likely to be appointed to regulate the payout of the money and how it is spent.

GREATER OVERSIGHT OF AUTOMAKERS
But all that help won't come without sacrifice. Company management will have to agree to tight oversight. They also will be forced to drop any opposition they have mounted in recent years to tighter fuel economy and emissions regulations. The United Auto Workers will likely have to make greater wage and benefit concessions for workers and retirees. And bond holders will likely be compelled to either write down as much as two-thirds of their investments or swap the debt for equity in the car companies.

Several Capitol Hill staffers on Friday said they also believed the government would probably try and facilitate a consolidation of GM and Chrysler, which had been talking about a merger two months ago before their financial conditions so drastically worsened.

General Motors, Ford Motor and Chrysler's desperate pleas for government aid were heard. Over the weekend, legislation to provide the big three with short-term loans to get them through the new year is being drafted, following an agreement between Speaker of the House Nancy Pelosi and President George Bush on how to fund the rescue.

Pelosi on Friday agreed to go the White House route and use loans from the Department of Energy originally intended to insure the companies would develop green cars in the future, rather than tap Treasury Secretary Henry Paulson's $700 billion Troubled Asset Relief Program funds.

Mark Zandi, the chief economist of Moody's Economy.com told the Senate that an automaker's bankruptcy would be "cataclysmic." With unemployment at 6.7%, gross domestic product in a tailspin and the banking sector wobbling like a newborn doe, the White House and Congress remain understandably averse to cataclysms.

"We must first prevent additional job loss from occurring. We cannot let the auto industry collapse, which would be catastrophic to our economy," said a Friday statement from Sen. Chris Dodd, the chair of the Senate Banking Committee, signaling his support.

President Bush's remarks Friday were much the same: "It is important that Congress act next week on this plan. And it's important to make sure that taxpayers' money be paid back if any is given to the companies."

It's a much better outcome for the automakers than after their first trip to Capitol Hill, where they flew in on private jets, presented vague plans and were sent home empty-handed. But before Detroit starts cheering, they'd be smart to recall a similar situation a couple months ago. If the $700 billion bailout of the financial system holds any lesson it's this: The car companies are not out of the woods yet.

Paulson's request for $700 billion two and a half months ago is fresh in the minds of those on Capital Hill. Deny him the money, he said, and the economy would implode. Any future economic problems (which by September were inevitable) could be blamed on the inaction of Congress. Despite the threat of apocalypse, they balked for two solid weeks as volleys of constituent disapproval filled the e-mail inboxes of Congress. At one point, the House's Web server crashed from the load. He ultimately got his money, but only after a political brawl unparalleled in recent memory.

America's automakers may be even less loved than America's bankers. All of this has the strong ring of deja vu, and just as rank and file Congressmen balked at bailing out Wall Street, embarrassing party leaders and forcing a dramatic showdown on the Hill, the deal for Detroit is far from done. The challenge is not writing the legislation this weekend. It's getting it passed next week. Are Pelosi and the Democrats up to the challenge? Detroit sure hopes so.

he British government will take over Royal Bank of Scotland Group PLC with a majority stake of almost 60 percent after the shareholders of the nation's second-largest bank shunned an emergency share issue.

The 20 billion pound ($31 billion) rescue takeover, the result of a plan announced last month, means that dividends on common shares will be scrapped and top executives' bonuses will be canceled. Chief Executive Fred Goodwin has resigned and Chairman Tom McKillop, who last week personally apologized to shareholders for the 85 percent fall in the bank's share value, has said he will retire next year.

RBS's 1.8 trillion pounds in assets are topped among U.K. banks only by those of HSBC (nyse: HBC - news - people ). Its operations around the world include Citizens Financial (nasdaq: CNFL - news - people ) Group, a commercial bank holding company headquartered in Providence, R.I., and Greenwich Capital Markets, based in Greenwich, Conn.

Fears about the solvency of RBS intensified this year as the global credit crisis contributed to it writing off 5.9 billion pounds ($9.2 billion) in bad loans. A third of that was due to last year's ill-timed euro14 billion acquisition of part of Dutch bank ABN Amro (nyse: ABN - news - people ).

The government's shares will be held by a company called UK Financial Investments LTD. Its charge is to maximize value for taxpayers and prevent politicians from making business decisions about the bank.

"The investment will be managed at an arm's length from government," the Treasury spokesman said.

The bank, which has indicated it could post its first ever annual loss this year, was forced to resort last month to the British government's bailout plan, which offered as much as 37 billion pounds to prop up RBS and two other U.K.-based banks, Lloyds TSB Group PLC (nyse: LYG - news - people ) and HBOS PLC. In all three cases, the government guaranteed to buy any shares not purchased by investors.

New jobless claims fell more than expected last week from a 16-year high, the government said Wednesday, though they remain at elevated levels due to the slowing economy.

The Labor Department reported that initial requests for unemployment benefits fell to a seasonally adjusted 529,000 from the previous week's upwardly revised figure of 543,000. That is lower than analysts' expectations of 537,000.

Despite the improved number, initial claims remain at recessionary levels. The four-week average, which smooths out fluctuations, rose to 518,000, its highest level since January 1983, when the economy was emerging from a steep recession.

The number of people continuing to claim unemployment insurance also dropped unexpectedly to 3.96 million, down from the previous week's 4.02 million, which was the highest level in 25 years. The labor market has grown by about half since 1983.

Economists consider jobless claims a timely, if volatile, sign of how fast companies are laying off workers. Employees who quit or are fired for cause are not eligible for benefits.

The economy has been hit hard in recent months by the housing slump and the broader financial crisis, which have led consumers and businesses to cut back on spending.

Higher unemployment could lead to a downward spiral, as laid-off workers are more likely to fall behind on mortgage payments and other debt. Those who remain employed also may become more conservative in their spending.

By Neil Irwin and Zachary A. Goldfarb

Washington Post Staff Writers
Wednesday, November 26, 2008; Page A01

The government said yesterday that it will deploy up to $800 billion to make it cheaper for Americans to get a home mortgage, take out a car loan or borrow money through a credit card, as the government's intervention in the financial system expands to directly address the impact of the credit crisis on consumers.

The Federal Reserve will launch a program by the end of the year in which it will buy up to $500 billion of securities backed by mortgages, which are guaranteed by Fannie Mae and Freddie Mac. The Fed will also buy up to $100 billion of debt in Fannie Mae and Freddie Mac, which should let them more easily expand their lending.

With the moves, the Fed will be pumping money into the economy through unconventional new means, steps that analysts said should reduce the rates that people must pay to take out a mortgage loan by as much as a full percentage point. In anticipation of the program yesterday, rates on mortgage securities fell about a third of a percentage point, a drop that is likely to be passed through to borrowers in the near future.

The Fed and Treasury Department are also creating a $200 billion program that will lend against highly rated securities backed by auto loans, student loans, credit card lending and small-business loans backed by the Small Business Administration. Lately, there have been few buyers for packages of those loans, making it difficult for consumers to borrow money.

Previous interventions have focused more on the inner workings of global credit markets -- injecting capital into banks, for example, and lending money to large companies. But those efforts have failed to spur the flow of lending to ordinary Americans, contributing to a steep decline in prospects for the overall economy.

Estimates varied on how much the Fed action will lower interest rates for ordinary home buyers. Jim Vogel, an analyst with FTN Financial, estimated that the Fed's facility could lower mortgage rates to between 5.5 percent and 5.75 percent for 30-year, fixed home loans. Recently rates have been hovering over 6 percent and have been nearly as high as 6.75. Other analysts expected a steeper drop, to roughly 5 percent.

Either scenario would help the economy. It would allow some people to refinance their mortgages, saving money on their monthly payment that they could then use for other things. And it might prompt others to enter the housing market as buyers, helping make the decline in housing less severe. "The market has been so volatile with rates changing from week to week that it has a depressing effect on the market," Vogel said.

In a normal recession, the central bank cuts the federal funds rate, a bank lending rate, to encourage growth. Two things are different this time. For one, the downturn appears likely to be more severe than recent recessions. So although the Fed has already cut the federal funds rate to 1 percent -- and may well cut it to zero percent by January -- it may not be enough.

Moreover, because this downturn is the result of a profound financial crisis that has caused lending to dry up, those interest rate cuts have not passed through to consumers. Since January, the Fed has cut the rate from 4.25 percent to 1 percent, yet the rate on a 30-year, fixed-rate mortgage has barely changed.

The major reason is that banks and other financial institutions are suffering huge losses that make them reluctant to lend. So the Fed is effectively printing money and funneling it to home buyers. In contrast, under previous recent bailout efforts, the Fed has swapped Treasury bonds for other, riskier assets, meaning it was not creating new money.

The Bank of Japan used this latest strategy in the 1990s, but too slowly, according to many economists, creating a downturn that lasted 15 years. The Fed's actions could stoke inflation in the future, particularly if the Fed is slow to remove the new programs as markets return to normal. But with prices for many goods falling, Fed leaders are more worried about a sharp decline in the economy.

The Fed will only purchase mortgage securities backed by government-sponsored companies Fannie Mae, Freddie Mac and Ginnie Mae, which have high standards for credit quality and caps on how large the loan can be. Because the Treasury took over mortgage-finance giants Fannie Mae and Freddie Mac in September, the government effectively already is guaranteeing the debt of those institutions.

The program announced yesterday commits the Fed to spend nearly 100 times as much to buy mortgage-backed securities as the government envisioned in early September, when the Treasury said it would buy $5 billion in mortgage-backed securities. Analysts said yesterday that nothing short of hundreds of billions of dollars of purchases will significantly bring down interest rates.

After seizing Fannie Mae and Freddie Mac, the government intended to push those companies to lower mortgage rates. The government instructed the companies to increase their purchases of mortgage securities by up to $100 billion over the next year. But that effort ran into trouble.

Despite the government intervention, Fannie Mae and Freddie Mac still had high borrowing costs, and they passed those costs on to borrowers.

Investors here and elsewhere were confused about the government's backing for Fannie Mae and Freddie Mac debt. The government said it was "effective," not "explicit," and that the companies' future remained unsettled. As a result, investors pulled back from the debt.

Fannie Mae warned in a public disclosure that it might not be able to do what the government asked without additional support for its debt.

Analysts said the package of actions aimed at consumers is a dramatic escalation of the government's battle to force credit to flow through the economy. "They're not messing around here," said Julia Coronado, a senior U.S. economist at Barclays Capital. "This is a very aggressive effort. They're not going to prevent a recession, it's too late for that, but they're trying to prevent a catastrophe."

The government, still struggling to manage a severe financial crisis, unveiled two new programs Tuesday that will provide $800 billion to try to help unfreeze the market for consumer debt from home mortgages to credit cards.

The announcements by the Federal Reserve and the Treasury Department represented the latest modifications to the largest government bailout in history, a program designed to keep the troubled financial system from dragging the country into a deep and prolonged recession.

Treasury Secretary Henry Paulson has been criticized for continually revising the focus of the government's response to the crisis.

Paulson on Tuesday defended all the changes, saying that there was no one response adequate by itself to deal with what he termed a once- or twice-in-a-century financial crisis. He said that was why the government was having to keep modifying its response.

"It is naive for any of us to think that when you are dealing with a situaiton of this magnitude that a bill could be passed or a single action taken to make all the issues go away," Paulson told reporters at a briefing on the new programs.

To try to increase the availability of home loans to borrowers, the Federal Reserve said it will buy up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will buy $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The program on consumer debt will lend up to $200 billion to the holders of securities backed by various types of consumer loans. It will be supported by $20 billion of credit protection from the $700 billion bailout package that was enacted last month.

The government, while looking to reduce fear in the credit markets, is eager to see lenders like credit card companies resume more normal levels of lending to help stimulate the economy. Since September, when credit markets first froze, financial institutions have been hesitant to hand over money for fear they won't be repaid.

On Wall Street, the new government efforts provided an early lift to stocks, but the Dow Jones industrials were down about 10 points in midday trading.

Meanwhile, data released Tuesday provided further proof the country is almost certainly in the throes of a painful recession.

The Commerce Department's updated reading on the economy's performance showed gross domestic product shrank at a 0.5 percent annual rate in the July-September quarter, weaker than the 0.3 percent rate of decline first estimated a month ago, and the worst showing since the third quarter of 2001.

GDP measures the value of all goods and services produced within the U.S. and is considered the best barometer of the country's economic fitness.

Meanwhile, the Standard & Poor's/Case-Shiller national home price index released Tuesday tumbled a record 16.6 percent during the quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

That, in turn, has made it harder for businesses and consumers to borrow.

Elsewhere, the New York-based Conference Board says its Consumer Confidence Index for November was 44.9, up from a revised 38.8 in October. Last month's reading was the lowest since the research group started tracking the index in 1967.

Economists surveyed by Thomson Reuters expected the November reading to slip to 37.9. Still, this month's figure hovers around levels not seen since December 1974, with Americans' views on the economy the gloomiest in decades as they grapple with massive layoffs, slumping home prices and dwindling retirement funds.

Consumers nationwide are reeling from job losses, tanking investment portfolios and sinking home values. They are expected to hunker down further in the coming months, making it likely the economy will continue to shrink through the rest of this year and into 2009, more than fulfilling a classic definition of a recession: two straight quarters of economic contraction.

Wall Street showed its relief Monday over the government's plan to bail out Citigroup Inc. - a move it hopes will help address some of the uncertainty hounding the financial sector. Stocks jumped more than 3 percent, extending Friday's big rally.

While the markets anticipated last week that some sort of rescue could occur, investors appeared emboldened by the U.S. government's decision late Sunday to invest $20 billion in Citigroup and guarantee $306 billion in risky assets. The move by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. is only the latest effort this year to support a banking system troubled by bad debt and flagging confidence.

Besides implementing its $700 billion bailout plan for the overall financial industry, the government has bailed out insurance giant American International Group Inc. and taken over lenders Fannie Mae and Freddie Mac.

The market is also a little more optimistic because President-elect Obama is set to introduce his economic team on Monday and has called for another economic stimulus. His plan targets saving or creating 2.5 million jobs during the next two years. Any plan is expected to exceed the $175 billion Obama proposed during the campaign.

The moves by the government to again step in and help a troubled bank as well as perhaps the broader economy helped buoy investor sentiment. Still, investors remain cautious because the nation faces a difficult economy and the stock market likely will continue to see volatility.

In midmorning trading, the Dow Jones industrial average rose 317.00, or 3.94 percent, to 8,363.42.

Broader stock indicators also jumped. The Standard & Poor's 500 index advanced 35.29, or 4.41 percent, to 835.32, and the Nasdaq composite index rose 60.83, or 4.39 percent, to 1,445.18.

The rise in stocks follows a rally Friday that saw the Dow industrials jump 494 points, or 6.5 percent. The other major indexes also rose sharply. Still, stocks ended the week with a loss after heavy selling Wednesday and Thursday.

Bond prices were mixed Monday as investors examined the government's bailout plan for Citigroup. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.29 percent from 3.20 percent late Friday.

The Treasury bill market showed continuing high demand, a sign of investors' caution. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.02 percent from 0.04 percent late Friday.

The dollar was mostly lower against other major currencies, while gold prices rose.

Wall Street shrugged off a larger-than-expected drop in sales of existing homes last month as investors instead focus on the government's rescue for Citigroup. And while the housing numbers fell short of expectations, Wall Street expected sales would fall sharply after last month's upheaval in the financial markets.

The National Association of Realtors says sales of existing homes fell 3.1 percent to a seasonally adjusted annual rate of 4.98 million in October. That's down from 5.14 million in September.

Citi shares surged $2.61, or 69 percent, to $6.38 on word of the government's injection of capital into the company.

Health care company Johnson & Johnson said Monday it would acquire Omrix Biopharmaceuticals Inc. for $438 million. The move is aimed at expanding J&J's surgical product unit; J&J will pay $25 per share for the company, an 18 percent premium over Omrix's close Friday of $21.16.

J&J rose 62 cents to $58.97, while Omrix rose $3.41, or 16 percent, to $24.57.

Overseas, in afternoon trading, Britain's FTSE 100 jumped 5.32 percent, Germany's DAX index rose 7.49 percent, and France's CAC-40 rose 7.34 percent. Hong Kong's Hang Seng index fell 1.59 percent; markets in Japan were closed for a holiday.

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