Monday, November 24, 2008

Citi Rescue Includes Equity Stake and Asset Guarantee

The new deal with Citi is that US taxpayers have invested $20 billion , plus we have guaranteed up to $306 billion in residential and commercial real estate and related securities. So, the Government has an equity stake in another ruined bank and is on the hook for $306B more.

Why are we investing more money in an instituion that has shown such absolutely foolish and short-sighted behavior? Just this Sunday, the New York Times published another increment in the unfolding saga of imprudent (nonexistent) risk management at Citi.

At least Citi is forced to lower the dividend (but not eliminate it). We can hope that some pressure is put on management to use the capital infusion to make loans, to keep the financial system working. Of course, that hope is predicated on the assumption that the best way out of the crisis is to get banks to make more loans. Wasn't that the problem to begin with?

The Government's aim is supposedly to bring stability to the overall financial system. In an era of networked information, why are we trying to fix a complex financial system with such blunt measures as multi-billion dollar bailouts of lending institutions? This is like trying to repair your iPod with a sledgehammer.


Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup

Citigroup Saw No Red Flags Even as It Made Bolder Bets
By Eric Dash and Julie Creswell