I don't know the answer to that question, nor do I think anyone else does, except for the top management at Citigroup and a few people at the Fed. Under the rules of the Federal Reserve Board's Term Auction Facility (TAF), Citigroup, or any bank, can borrow money at an interest rate that is below the discount rate, and put up mortgage backed securities, which could be nearly worthless, as collateral. This sounds like a good deal if you can get it. Do we want to keep our major banks operating? Of course we do, but don't we want to replace the incompetent managers that ran them into the ground and make the shareholders take their full hit? After all these people don't share their huge salaries or the gains on their stock in good times with the rest of us. There is an even more fundamental issue. If you were one of the insiders at Citigroup who knew that the Fed was keeping the bank alive on life support, would you short Citigroup stock? Being the cynic I am, my guess is that some people in this position would short the stock, essentially burning the current shareholders for not having the same inside knowledge. The reality of course is that none of us knows the real situation at Citigroup or any other bank that the Fed may be keeping alive with its TAF. If a bank that is borrowing heavily at the TAF goes under, it would be the next big scandal in the financial world. It would be reasonable for reporters to do some poking around and to ask Fed Chairman Ben Bernanke why he feels the need for such secrecy. Did the country get in this mess because we had too much transparency?
--Dean Baker
