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Citigroup gets $20bn bail-out

The US government rode to the rescue of Citigroup, entering an agreement to backstop up to $306bn in problematic assets and injecting $20bn in capital to restore confidence in a bank that defines the term "too big to fail".

Beyond the misleading headline (the commitment of public money is potentially $277 billion beyond the $20 billion equity injection), this is a perfect demonstration that "too big to fail" institutions are a Clear and Present Danger to our economies.

Their size means that they can take reckless risks and, with absolute certainty, dump the losses on the taxpayer. This cannot be seen as acceptable by any reasonable person, and it should thus be prevented. There are two routes to do that:

  • a break-up, to reduce the size of the resulting entities to "not too big to fail" - with ongoing limits in that respect, and a commitment to let the resulting entities go bankrupt if their situation so warrants;
  • stringent regulations limiting the kinds of activities they can enter, the risks they can take, and the remuneration structure of employees;

This, of course, can only apply going forward, but the current bailout should include punishment for those that brought us to the current situation: it is unbelievable that any part of the senior management of Citi is still in place, and it just as unacceptable that the taxpayer equity purchases are in the form of non-voting shares getting 8% (Buffet got a 10% return, plus warrants, for its investment in Goldman Sachs; the UK government got 12% for its own equity injections in UK banks, and Barclays agreed to pay 14% to Qatari investors to avoid public money).

Deregulation of finance in the past decade is already the most expensive mistake ever, including for bank shareholders, and has only massively enriched management, a few other bank executives, and those who hatched the reckless schemes those executives committed vast sums of bank money to. It's time to stop the fiction that "markets" are more efficient in that sector.

Originally posted to Jerome a Paris on Mon Nov 24, 2008 at 05:32 AM PST.

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