Bailout for loans and losses - Views on News from Equitymaster

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Bailout for loans and losses

Nov 24, 2008

Driving on loans
Around 9 months earlier, the Tata group had paid US$ 2.3 bn for acquiring luxury car maker Jaguar Land Rover (JLR) and had raised a bridge loan of US$ 3 bn to finance the deal. Since then the global financial turmoil has hit the auto industry forcing JLR to cut down on production so as to sell its piled up inventory of vehicles. In fact, the Tata's are bracing themselves for a likely financial stress over the next 2 years. They are reportedly seeking a 1 bn loan from the UK government.

While UK government's response will be known in about 2 week's time, JLR would be hopeful of a positive response on the back of similar instances elsewhere in Europe. One of the considerations for the UK government in keeping the carmaker afloat would be preventing further job losses in an already gloomy situation. JLR has a workforce of 15,000.

We wonder if the Tata group is just a victim of bad timing or has it bit more than it can chew and has over-stretched the balance sheets of its companies?

US$ 100 bn at stake in Citigroup
The US regulators are in negotiations with Citigroup to contain the bank's possible losses on US$ 100 bn worth of toxic assets - mortgages, bonds, auto loans and corporate loans. As per Bloomberg, the assets will remain at Citigroup. The US government will assume losses beyond a specified amount. It may be noted that Citi's stock plunged by 60% last week raising concerns over its health.

The US government's intervention in this case is line with what it has done in earlier instances such as JP Morgan's acquisition of Bear Stearns and Citigroup's failed attempt to acquire Wachovia. The company is asked to absorb the initial losses, while the government guarantees the losses beyond that.

Citigroup's failure would indeed be the last straw on the proverbial camel's back.

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