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Brad DeLong has an essential post on what went down at Citibank. The piece should be read in full, but one of the broader points worth drawing out is that during a financial crisis, banks fail. If they did not fail, then they'd be doing something wrong. Brad writes:
It's in the nature of a bank to get into trouble and be on (or over) the edge of failure in a financial crisis. Banks exist to provide liquidity and safety: to turn the long-term highly-risky investments in plant, equipment, and infrastructure that are our social capital into the short-term liquid largely-safe assets that savers largely want. This means that banks are--if they are doing there job--long duration and long risk, and their values crater whenever there is a financial crisis because a financial crisis is a sharp fall in the value of long-duration and high-risk assets. A bank that has not lost massive amounts of value in the past year and a half is either extremely nimble or extremely lucky...The question of how much duration and risk a bank should assume per dollar of capital is a knotty one--if you match durations and assume no risk, then your stock value never crashes. But shareholders are paying you to be a bank, not to be a not-bank.Read the whole thing, etc.
