So Ben Bernanke goes to the London School of Economics, gives a long, boring economist type speech and just happens to drop in the middle of it that yes, indeed, the plan to buy toxic assets from banks which formed the basis of the TARP may indeed have to be exhumed. Then Citi announces it’s going to massively restructure while the whisper number for their year-end loss it north of $10 billion. Does anybody else feel like we have gone nowhere in the last three or four months?

First, let’s look at Bernanke’s statement.

In the United States, a number of important steps have already been taken to promote financial stability, including the Treasury’s injection of about $250 billion of capital into banking organizations, a substantial expansion of guarantees for bank liabilities by the Federal Deposit Insurance Corporation, and the Fed’s various liquidity programs.  Those measures, together with analogous actions in many other countries, likely prevented a global financial meltdown in the fall that, had it occurred, would have left the global economy in far worse condition than it is in today. 

However, with the worsening of the economy’s growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions.  Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.  A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets.  The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.  Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered.  Public purchases of troubled assets are one possibility.  Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks.  Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.  These methods are similar from an economic perspective, though they would have somewhat different operational and accounting implications.  In addition, efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability.

If you don’t want to parse all of that, in a nutshell he said that even though we put a quarter trillion dollars into the banking system, it’s still dysfunctional and needs more and we’re working on a couple of ways to do that. Oddly, the preferred way now seems to be to buy the bad assets from the banks. But only a couple of months ago, despite the fact that he and Hank Paulson had sold the U.S. Congress on the TARP as a vehicle to do just that, they did an about face and recapitalized the banks with cash infusions justifying their actions thusly:

“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending,” said Paulson.

Then, on cue, Citi announces that it intends to radically downsize its operations and concentrate on serving large corporate clients through its wholesale banking operation and targeting retail customers in selected markets. It’s Smith Barney unit is, as previously reported, to be spun off to Morgan Stanley and everything else is presumably up for sale. At this point I have read precious few reports that consider any of this to have been undertaken voluntarily by Citi.

So Citi, which was the beneficiary of one of the biggest slugs of TARP money to start with and then came back to the trough for another $300 billion in cash and guarantees still can’t seem to make a go of it without carving itself up. The question is, who is going to buy all of this stuff from Citi and if you do find a buyer aren’t they likely to be only interested in the good assets, so that In the end the junk that Citi has to retain just gets stuffed into a shrinking bank? Somehow it doesn’t sound like much of a plan.

As much as I hate to use this word, it may be time to just nationalize Citi and restructure it. If that means the shareholders and the debt holders get wiped out then so be it. Take the toxic assets out and put the pieces together in some coherent fashion and sell a workable financial institution back to the public. It won’t happen overnight but we may be able to get some of our money back that way. Right now, we appear to be pouring it down a rat hole. And if Bank of America or JP Morgan or any of the others come hat in hand again, then they deserve the same medicine.

At this point, the credibility of Bernanke and the current management of the Treasury is at about as low a point as it can get. Any further half measures that don’t advance the ball have to be unacceptable.

more: text of Bernanke speech, WSJ