Last night Federal Reserve and CitiGroup officials dropped a financial bomb, emerging from all-weekend talks to say that the U.S. taxpayers are bailing out Citi.
It was the inevitable result of policy decisions made a decade ago, after CitiGroup broke a 70-year-old law by merging with the Traveler's Insurance Co. The illegal merger was blessed by the cops--that is, the Federal Reserve, the Securities and Exchange Commission, and the Justice Department.
Everyone knew then that Citi was too big and important to bother with trifles like the Glass-Steagall Act, passed during the Depression to erect a firewall between stock brokerages, banks, and insurance companies so that trouble in one sector would never again threaten to bring down the whole financial system.
Everyone knew that CitiGroup--with friends in the Clinton Administration as well as the Republican congress--would simply change the "obsolete" law, which it did.
Then Citi continued its buying spree, gobbling up Associates First Capital, a big, shady subprime mortgage lender, and burrowing crapulously into the then-burgeoning market in over-the-counter derivatives.
The resulting failure was utterly predictable, if not preordained. Nothing to do now but open your wallet, turn out your pockets, sign away your first-born son, and praise the Capitalist System.
As the Wall Street Journal (pay site) reports: