On Sunday, Citigroup received a second bailout from the federal government, which agreed to protect the financial giant against losses on over $300 billion of troubled assets. The market sure was pleased, with the Dow surging almost 5 percent yesterday. But economic types aren’t feeling it. Some aren’t pleased about the lack of accountability — no executives will lose their jobs in the rescue deal. Others believe that, like that mangy neighborhood cat that you fed because you felt bad for it, struggling banks will inevitably return for more government handouts. And, oh yeah, it might not even work.
• Eric Dash thinks the bailout has, in the short term, “removed the risk that a sudden failure of the giant bank would send losses cascading through the financial industry,” but in the long term may “ultimately may encourage banks to take more risks in the belief that the government will step in if they run into trouble.” [NYT]
• Matthew Yglesias believes “these concerns about moral hazard can be overrated.” But even so, “Paulson is proceeding as if this isn’t a concern at all. Or, rather, as if the health and welfare of wall street managers and shareholders is his primary responsibility.” [Think Progress]
• Felix Salmon “can’t think of anybody whose confidence in Citi has been shored up by the weekend’s cash injections, especially since the mechanism — weird second-loss asset guarantees on a small part of Citi’s balance sheet — is so opaque.” [Market Movers/Portfolio]
• Damian Paletta and Deborah Solomon write the the Citigroup bailout “is creating new confusion about the government strategy to shore up volatile markets.” While “officials involved in the rescue are hopeful that they finally got it right by creating a template for future efforts,” the rescue effort has also “fueled the criticism that the Bush administration is willing to do anything to bail out the biggest banks, while letting smaller ones, consumers, and small companies, fail.” [WSJ]
• Robert Reich calls it “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.” Meanwhile, a million autoworkers and “six million homeowners in danger of losing their homes” are being ignored. [Robert Reich’s Blog]
• David Corn is kind of pissed that Citigroup executives get to keep their jobs. It’s upsetting “that many of the people who steered us into this disaster … were able to make millions of dollars a year screwing up and now do not face the same consequences as those thousands of Americans who are being laid off or those who have lost their retirement security.” [CQ Politics]
• Joseph A. Giannone writes that Citi’s quick turnaround — from assuring it didn’t need any more assistance to quickly accepting billions in aid — “has many investors wondering what other banks are hiding.” [Reuters]
• Paul Krugman isn’t happy at all, writing, “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.” [Conscience of a Liberal/NYT]
• Clay Risen says the deal “highlights how poorly Washington has dealt with the underlying causes of the crisis.” It has simply trusted that the banks they prop up “will know how to fix the problem, and that they’ll want to,” but that hasn’t been the case. In the case of Citi, “the industry’s recalcitrance is now readily apparent — and yet the government negotiators continue to give it the benefit of the doubt.” [Plank/New Republic]
