Treasury officials say they believe in free markets, Robert Kuttner writes, but spent the past month arm-twisting other banks to mount a government-induced rescue of Citigroup. He explains:
Citigroup's affiliates have exposure totaling at least $80 billion. The Treasury persuaded several other banks to put up a huge pool of capital that will promise to buy securities that markets may not want, in order to keep market confidence (and bank balance sheets) from collapsing. In effect, the Treasury just added another layer to what may be a house of cards.The Treasury made sure to leak details of the plan over the weekend, presumably to offset the grim news of Citigroup's quarterly report on Monday, which showed a 57 percent drop in earnings. Officials familiar with the plan say one purpose is to prevent the banks from having to mark down the value of assets in a depressed market, which would further weaken their balance sheets.Nobody knows whether this plan will work, since at the end of the daisy chain somebody has to be willing to buy debt partly backed by assets that may never pay off. The Treasury is gambling that if a big enough pool of money is organized, markets that panicked will begin functioning normally again. Bad debt and good debt will be sorted out and life will go on.It sure is nice to have a friend at the Treasury.
Read the whole thing (and comment) here. --The Editors
