Bankenstein Lives!

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:

This, of course, is the same thing Treasury Secretary Henry Paulson said he would do


. . . and then said he wouldn't do last week.

CitiGroup is far more than a "bank." It is one of the

subprime mortgage originators, runs

and even a

, among many other things. Mostly, Citi is an entity with about $2 trillion of "assets" on its balance sheet. Of that $2 trillion, about $135 billion were marked

as of Sept. 30. That's down about $25 billion from its June 30 report. It is certainly coincidence that $25 billion was the amount the U.S. Treasury


But that's only two-thirds of the CitiGroup story. The monster has an additional $1.23 trillion of "assets" that it has kept off its balance sheet. Now, given that this is, strictly speaking, "legal," one must note that corporations have myriad reasons for keeping their assets off their balance sheet, so they are unreported to outsiders, share holders, various meddling regulators, and such. But the most compelling reason--and the reason most relevant, historically--is that those assets are no such thing. They are, usually, net liabilities. Enron is just the most infamous example.



reports that Citi's off-balance sheet assets include "$667 billion in mortgage-related securities": "Citigroup has tried repeatedly to rid itself of its exposure to those assets -- and nearly hammered out a similar arrangement with the government nearly two months ago."

Basically, Citi tried to hide its own losses inside its attempt to buy Wachovia. That scheme collapsed when Wells Fargo outbid Citi for that failed bank. Citi's next plan, according to the


's unnamed source, was to unload its losses under the Troubled Assets Relief Program. But then Paulson changed the TARP plan to a stock-buying scheme (so far as we know).

As investors started catching on to Citi's dire condition, they pummeled the company's stock, pushing it to a 13-year low on Friday. That forced emergency meetings between top Citi and government officials this past weekend. The plan emerged late Sunday evening. Again, the




There is no way yet to know the value of Citi's assets. But the reported amount that you and I are now "back-stopping" is perhaps telling: $306 billion is just different enough from a round number to be suggestive.

Worry, the


says: "While Citigroup's recent woes don't appear to be as severe as the problems that ultimately felled Bear Stearns Cos. and Lehman Brothers Holdings Inc., the U.S. government seems to have decided it can't afford to gamble on whether Citigroup will weather the storm."

Erm . . . well. Just before it collapsed, Lehman Bros.' L-3 assets totaled about 20 percent of its total balance sheet. Citis' at the time totaled 25 percent of total assets--not counting what's off balance sheet.

Finally, still the


: "On Sunday evening, government officials were locked in meetings to hammer out the final terms of an arrangement that will leave the government deeply enmeshed in the inner workings of one of the world's largest financial institutions."

Indeed. It's fair to say that the government has always been "deeply enmeshed" in Citi--or vice-versa. One need look no further than Robert Rubin, the former CitiGroup chairman, former treasury secretary, the man who shepherded the deregulation of the banking industry and the relaxation of significant finance rules. He is, as the

New York Times

notes, President-Elect Barack Obama's