WSJ Confirms Aid For Citi

That didn’t take long. Here is a WSJ article that reports the government is indeed discussing the purchase of some of Citi’s toxic assets.

While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a “bad bank.” That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.

The bad bank also might absorb assets from Citigroup’s off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company’s balance sheet. Citigroup also has about $2 trillion in loans, securities and other assets on its balance sheet as of Sept. 30.

Behind the push is a broad effort to shore up faith in the New York company, which saw its stock price tumble by 60% last week to a 16-year low.

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.

It would seem that Paulson’s plan to put the balance of the TARP funds on the shelf until the next administration arrives has changed yet again.

So where do we go from here. If the AIG saga provides any guidance, the amount of aid to Citi will most likely grow. More to the point, who is next. Citi doesn’t have an exclusive on the ownership of junk. This buys Citi some time but why won’t the markets train their sites on Bank of America, JP Morgan, a large swath of the European banking community as well as smaller banks. Indeed, this might well throw the whole system into turmoil as it seems to be an admission that the original recapitalization via the TARP was less than what the system needs.

With Watergate it became political gospel that you can survive the scandal but the cover up will kill you. We may be finding a corollary to that when it comes to bank resuscitations. It might well be that half measures fool no one and inevitably lead to what you hoped to avoid.

Tom Lindmark

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