January 13, 2011 Extraordinary Financial Assistance Provided to Citigroup, Inc.

Thank you Gretchen Morgenson for finding this gem of a report from SIG TARP on her
"Citi’s Torch Has Passed. Now Find a Knife." editorial. It is apparent that some in Government understand NTBTF well.  I believe that Tim Geithner did his boss a dis-service by saving Citi from dismemberment and or bankruptcy and thereby not making it the example to have deflected the Tea Party and the 99 percent protestors.  The low rates that the FED has implemented has given Citibank the breathing room to rebuild its book at the expense of saver's in society and are part of the economic malaise that could cost Obama his re-election.

The gist of the report is in its opening written below.

Unless and until institutions like Citigroup can be left to suffer the full consequences of their own folly, the prospect of more bailouts will potentially fuel more bad behavior with potentially disastrous results. Notwithstanding the passage of the Dodd-Frank Act, which does give FDIC new resolution authority for financial companies deemed systemically significant, the market still gives the largest financial institutions an advantage over their smaller counterparts by enabling them to raise funds more cheaply, and enjoy enhanced credit ratings based on the assumption that the Government remains as a backstop. And because of the prospect of another Government bailout, executives at such institutions might be motivated to take greater risks than they otherwise would. 

The Dodd-Frank Act was intended in part to address the problem of institutions that are “too big to fail.” Whether it will successfully address the moral hazard effects of TARP remains to be seen, and there is much important work left to be done. As Secretary Geithner told SIG TARP, while the Dodd-Frank Act gives the Government “better tools,” and reduced the risk of failures, “[i]n the future we may have to do exceptional things again” if the shock to the financial system is sufficiently large. Secretary Geithner’s candor about the prospect of having to “do exceptional things again” in such an unknowable future crisis is commendable. At the same time, it underscores a TARP legacy, the moral hazard associated with the continued existence of institutions that remain “too big to fail.” It also serves as a reminder that the ultimate cost of bailing out Citigroup and the other “too big to fail” institutions will remain unknown until the next financial crisis occurs. 

The full report is available at the pdf link Extraordinary Fiancial Assistance