Commentary

Citigroup is back from the Dead – for now

It was another Sunday night rescue for the folks at the U.S. Treasury, the Federal Reserve and the newest addition to the cast of the Wall Street crisis and financial bailout drama, the Federal Deposit Insurance Corp. (FDIC). This time the dynamic trio swooped in to arrange a bailout of Citigroup, the struggling U.S. banking giant with operations spanning the globe. But, they seemed to tear a page right out of the AIG rescue playbook, throwing in capital and guaranteeing toxic assets.

The Wall Street Journal had this to say about the weekend affair;

“The agreement marks a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions.”

Funny, I thought that the whole point in the Treasury’s shift toward buying equity stakes in (a.k.a, nationalization of) financial institutions was to avoid loading up the government’s balance sheet with smoldering piles of crappy assets. Now the feds seems to be doing both. Didn’t they pull the same tactic with AIG’s messy stew of credit default swaps (CDS)? When will this all end?

The Wall Street Journal added the now familiar line of guarded optimism:

“If the government’s rescue plan is a success, it could help bring stability to the entire financial system. If it doesn’t, even deeper doubts about the industry’s future could spread.”

This is the same drivel spewed from most major news outlets after the rescues or shotgun marriages of Bear Stearns, Fannie Mae and Freddie Mac, Merrill Lynch and AIG. It really is sounding like a broken record – or maybe it’s just a bad dream that keeps haunting us on random Mondays.

The trio of the Treasury, the Fed and the FDIC offered the same bland reassurances that came after previous hastily arranged Sunday night bailouts:

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.”

This is not comforting anymore. I think the key to where the problem with the government’s ever-expanding financial bailout lies is in this passage from the WSJ article:

“Despite the unprecedented scope of the rescue plan, it’s not clear whether it will be enough to stabilize Citigroup. The roughly $300 billion pool of assets that are included in the rescue plan represent only a sliver of the company’s more than $3 trillion in assets, including its holdings in off-balance-sheet entities.

Jitters about such ‘hidden’ assets helped trigger the nose-dive in Citigroup’s stock last week. Among the off-balance-sheet assets are $667 billion in mortgage-related securities.”

This means that the Citigroup “plan” is following in the drunken footsteps of the AIG fiasco (the size of the AIG original bailout almost doubled in the course of three months). The feds are now insuring $300 billion worth of loans and securities tied to residential and commercial real estate. Citigroup has well over $600 billion tied up in this garbage. If the real estate market continues to deteriorate, so to will these assets, and the government – more specifically, you and I – will be left holding a really big and extremely smelly bag.

Stock markets around the globe were in rally mode today after the news of Citigroup’s rescue from the abyss, with shares in U.S. financial institutions leading the charge. But, the latest bailout of yet another hobbled financial giant does little to address the floundering real estate market, the credit crunch, the Wall Street crisis, and the declining economy. The banks that received aid from the Troubled Asset Relief Fund (TARP) are using the funds to repair self-inflicted wounds; credit is still flowing at a mere trickle. The government’s financial rescue of the banking system is proving to be both costly and ineffective.

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© 2008 Splendid Marbles.