Last night, federal regulators “approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank.” The rescue package “shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering [Citi’s] stock after its 60 percent plunge last week.”
Citigroup is a huge financial institution, with $2 trillion in assets tied up in over 100 countries. It really is the epitome of “too big to fail.” However, the bailout of Citigroup is symbolic of Treasury Secretary Henry Paulson’s continued flailing about with the $700 billion Troubled Assets Relief Program (TARP).
As the Wonk Room noted last week, Paulson’s declaration that the banking system “has been stabilized” was followed by Citigroup’s dive into the tank. Now, after assuring everyone that he didn’t need to use any more TARP funds to secure troubled assets, Paulson has done just that to save Citigroup. As Tyler Cowen at Marginal Revolution asks, “Didn’t Paulson tell us just a few days ago that TARP wasn’t needed after all? Doesn’t this mean that Paulson should speak less frequently?”
The emerging consensus from economists is that Citigroup received a sweetheart deal, which is not in the taxpayer’s interest. Nobel Prize winning economist Paul Krugman wrote that “A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.”
Former Secretary of Labor Robert Reich concurs, writing that, “This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi“:
In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
As James Kwak as The Baseline Scenario notes, Paulson’s message amounts to “We will protect some (unnamed) large banks from failing, but we won’t tell you how and we’ll decide at the last minute. As long as that’s the message, investors will continue to worry about all U.S. banks.”
Indeed, Paulson is not inspiring any level of confidence, moving haphazardly from one proposal to the next, and focusing solely on salvaging the financial sector while doing nothing for the people whose money is financing the salvage effort.