Credit crisis spurs massive new bailout

What happened

The federal government this week took dramatic new steps to halt the collapse of the financial system, pledging up to $320 billion to rescue Citigroup and $800 billion to purchase toxic debts and pump cash into frozen credit markets. Most of the $800 billion will go toward purchasing mortgage-backed securities so that mortgage lenders will be more willing to provide home loans to credit-worthy consumers. Some funds will also be used to encourage issuers of credit cards, student loans, car loans, and small-business loans to open their wallets. “This is a very aggressive effort,” said Barclays Capital economist Julia Coronado. “It’s too late to prevent a recession, but they’re trying to prevent a catastrophe.”

The Citigroup bailout came after the once-mighty firm lost 60 percent of its value in one week, raising the specter of a run on the bank. To restore confidence in the company, the government invested $20 billion in the firm and promised to cover losses on some $300 billion in “toxic assets” on Citi’s balance sheet. In return, Citigroup will grant the government preferred stock shares, withhold dividends to shareholders, and limit executive compensation. The Citigroup rescue marks the largest federal bailout yet for a single institution.

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What the editorials said

You’ve heard it before, said The Dallas Morning News, but “Citigroup truly is too big to fail.” No one is thrilled about having to ride to the rescue of another bank that bet recklessly on sub-prime mortgages, but with $2 trillion in assets and more than 200 million clients in 100 countries, Citigroup is not just another bank. “If Citi went down, it could easily take the entire world financial system with it.”

“But to rescue it without calling out those who engineered the disaster would be an affront to justice,” said the New York Post. Citigroup’s directors were grossly negligent, and perhaps the worst offender was Robert Rubin. As Bill Clinton’s Treasury secretary, Rubin engineered the deregulation of banking “that made so much of the current mess possible.” Yet by the time Rubin left Citi’s board last year, he was $107 million wealthier. As for the remaining directors, “if they had any sense of dignity, they’d simply quit.”

What the columnists said

“Enough already,” said David Lazarus in the Los Angeles Times. The problem with these bailouts is that taxpayer money gets put on the line, yet all we get in return is hope. If our money is going to be used to prop up “these hopelessly mismanaged companies” or to back up credit card and other types of debt, let’s also demand that failed management be fired and that companies adopt pro-consumer policies. “It’s time we started getting more bang for our billions.”

That’s the key challenge facing the incoming Obama administration, said Steven Pearlstein in The Washington Post. In the meantime, how about giving some credit to the outgoing one? While the Bush administration’s rescue efforts seem haphazard, the economic collapse is a moving target, and no single initiative could ever suffice. “To suggest, as some have, that the entire effort has been a failure ignores the harsh reality that without the efforts so far, things would actually have been worse—a lot worse.”

But let’s at least be clear about how much these bailouts are actually costing, said Mark Pittman and Bob Ivry in Bloomberg.com. For all our hand wringing over the $700 billion plan passed by Congress two months ago, that’s only a fraction of what the government has committed. The total amount pledged so far comes to more than $7 trillion. That’s “nine times what the U.S. has spent so far on wars in Iraq and Afghanistan” and “could pay off more than half the country’s mortgages.” But good luck finding out where all that money is going.

What next?

Few believe the Citigroup bailout will be the last. Already, there are indications that Morgan Stanley, Goldman Sachs, and several smaller firms may seek a similar arrangement, in which the government agrees to cover future losses. “We have made these kinds of decisions in the past,” President George Bush said during a press conference this week, “and if need be, we’re going to make these kind of decisions to safeguard our financial system in the future.”