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Monday, November 24, 2008


Citibank has been saying they're fine, they're well capitalized, they're not in jeopardy. This weekend the government stepped in and backstopped them on 300 billion of losses after Citi loses 40 billion. Thank goodness they're well capitalized - imagine how much they'd need if they weren't.

The market's initial reaction on this news is to rally. I can understand some relief that Citi isn't going under any time soon. I think the admission that Citi was in such dire straits that it needed a gigantic rescue package to survive is very scary and not a cause for celebration.

The FDIC entered the year with 53 billion in capital. Indymac, which was seized by federal regulators earlier this year, cost them ~12 billion. Since then, they have participated or individually guaranteed literally an infinite amount of deposits. The FDIC will clearly need more capital down the road.

The government continues to try to fix a leverage problem with more leverage. It seems implausible to me that this will be a successful strategy. They're shoring up bad managements and business models with capital influx -- good money after bad. Headlines like Citibank being rescued do not inspire confidence. They inspire fear. A week ago Paulson testified before congress that buying bad paper was not the appropriate use of the TARP funding. Now we've got an agreement to buy bad paper from Citigroup.

All these guys do is react and write checks -- it's pretty concerning.

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