The Last Straw

Wouldn’t you have thought that if you were dispensing billions of dollars to banks that had gotten themselves in trouble that you would have put some stipulations on how they use the money? Or even more basically, that they use the money?

That might have been akin to thinking ahead, which is something nobody’s going to accuse this team of doing.

In any case, we got to a situation where Citigroup, with some $2 trillion in assets, had its shares selling at one point for a bit over $3 per. The flashing red lights go on at Treasury! This is no fire drill, this is the real thing! Another institution too big to fail is moving toward the tipping point! Hank and company to the rescue!

In a reversion to what proved a failed strategy the first time around–saving individual institutions deemed too big to fail–Hank and company rode to Citi’s rescue with a loss-sharing agreement on assets worth some $306 billion. Citi will have to suck up the first $29 billion in losses, but after that the government’s on the hook for 90% of the remainder, or some $250 billion.

Citi probably is too big to fail without flooding the global financial system with catastrophic consequences. But part of the reason it got to the point of having to be rescued like some gigantic damsel in distress is that the Treasury Secretary has been sending out signals that are mixed at best and incoherent at worst.

We may indeed be going through an unprecedented chain of events, and maybe the powers-that-be have to learn as they go along. But that doesn’t give them permission to keep grasping at straws, all the while insisting that this is the very last straw, the straw that takes care of the problem.

The last straw, after all, is the one that broke the camel’s back.