When I read this I can't help thinking of my grandchildren. Five of them are in debt for their college loans. Two would like to go to graduate school and can't afford it. Most of their friends are in the same boat.

How about all of those credit card debts, too. Can't even take them off in a bankruptcy any more.

Where is justice? Or does it even exist anymore?

"Funny". Poor Citi feels it's bleeding to death in the Street, will passers-by, please, take it to the emergency room (bailout), pronto. But, as recently as a month ago, Citi, seemed to feel it had enough money to buy out Wachovia. Granted, it wanted to buy at a fire-sale price but it also had enough to go to court, when it was outbid (by Wells Fargo).

What was Citi thinking of then? That they'd get a bailout which was twice as big? Or simply that the buy-out would assure them of one (too big to fail)? Because, certainly, they *had to* know they were in the same "dire straights" they're in now.

First for Mari, if a global bank like Citi goes down, your Grandchildren, and mine will have rather different issues than national debt payments.

Second, frankly in a situ (the current) where absolute panic is taking hold, it is useful to try to head this off as historical experience indicates that this tends to provoke reeeaally terribly bad things, rather worse than 3rd generation debt payments. The time to be worrying about your bloody grandkids debt payments was h years ago. Now you need to fuck all to pull out of a death spiral. And hey if it turns out all is col in 5 years, ratchet up the taxs to claw back; if the centre left is right, you be good. If not, we are all truly fucked.

Well, all I can say is this is hard to take after years of not going into debt personally. Living frugally, and not having a damn thing to say about what has been going on. I have written to my reps and letters to the editors, and even demonstrated. Lot of good it did.

What's going on now is so far beyond what I can understand, it makes my head ache!

By the way, I hope you meant my grandkid's bloody debt, not my bloody grandkids. They are pretty special, actually/

Mari you just got the "Too Big To Fail" argument. It's the same scam they've been running on us for a year.

Toxic framing...

Can we stop referring to derivatives leveraged around collateralized debt leveraged around even more counterpary obligations as "toxic debt"?

That shit is, and was, play money spun out of the unregulated ether by the smartest players in the room. It is monopoly paper money. The fact that American citizens are being asked to bankroll this funny money, to use their future tax revenues to make it real is being lost in the discussion.

Let's be very clear here:

American taxpayers are being asked to make this funny money real so that various Wall Street players can keep the wealth they created for themselves out of toilet paper. We are investing in millionaires, so that they can remain millionaires.

So what can WE do to stop it?

Unfettered, free market capitalism doesn't work. We ought to be tough on these guys until the last of the bastards admits it doesn't work, and that we need something better. I'm not sure just regulating the system is the answer. Why not something we haven't thought of before? Is the entire universe devoid of anything other than regulated capitalism?

I'm not unappreciative of the fact that in a global economy we are all interconnected, and that the shareholders of these failed institutions include us, through maybe our 401(k)s, or jobs, or dependencies that are convoluted and not so obvious, but there nevertheless, but I still think the shareholders should bear the brunt of the risk, even though they 'r' us. But the managements, the boards of these companies should pay dearly, and the days of obscene executive compensation, indeed, obscene compensation in any field, ought to come to a close. Our values are totally screwed up, if we think one human being is worth 10,000 times more than another.

To answer your question, Hilzoy... the government is surely concerned about moral hazard, as you are, but the problem with really screwing shareholders is that you discourage the kind of private investment that might recapitalize these companies without relying solely on the taxpayer's dime. Investors would be less likely to put in money if they knew that a possible government intervention would wipe them out. So it's a balancing act.

Kudos to koreyel. Wall Street, by and large, is nothing but a gambling casino played with chips that aren't real, but become real when we honor them, which we have done because we don't understand what's going on. Wall Street is a place where phony money becomes real money because we're being had by the rich, who steal from us not directly, but by pumping up their balance sheets with a lot of hot air, because we let them do it.

Everyone smart enough to see what's going on is either part of it, and won't squeal, or is ostracized as a crackpot, or a Marxist.

Shareholders AND bondholders should get soaked before taxpayers do. That will teach them not to be such morons. You want to protect customers and counterparties (their withdrawal is where systemic risk comes in), not investors, who should have known better.

So---what we're looking at here is the original plan for the bailout---the one that Paulson's been saying for the past two weeks wouldn't work; the one that had to be changed because "buying toxic assets" was completely non-functional---is now the exact plan to be implemented for Citi?

The only thing that's going on here is the Bushylvanians are trying to buy enough time to run out the clock, get as much of that $700 billion in their pockets as is possible, stick the taxpayers with the tab---and then get the hell out of Dodge before the house of cards explodes in a ball of nuclear flame.

If it were me, I'd let the whole damned thing go down the tubes. It's the only thing that'll get the People angry enough to force their collective governments to go after the swamp-swill that caused this mess---the only thing that'll make the world stand up and forcefully declare---"Never Again."

Beyond that, the world needs to move beyond this culture of economics. Take that glass house and smash it to shards, and there will finally be a world free from the greed that's driven by profit.

A world that's ready to abandon oil, and the stock exchanges, and the banks---a world that finally acknowledges that there IS enough to go around for all---a world where those with the most ability to pay their debts don't get to dump those debts on everyone else.

Let. Citi. Burn.

Ultimately, I think Hilzoy's question is right, and I'm afraid I don't buy Wagster's argument. Rescue of shareholders, actual OR potential, alters risk and thereby distorts incentive, a generally undesirable thing, as I think everyone from the left to the right would agree. Also, it's not clear to me that encouraging new investors to enter at distorted prices does anything more than "kick the can"; we may reduce the need for government funding now, but later, either there will be another crisis as true prices emerge and the new investors get a severe haircut, or (more likely to my mind), the government will have to spend money to fulfill whatever promises it must make today in order to attract those investors in the first place.

As to dilution, if the government does not act, then shareholders may well be wiped out completely. Dilution of existing positions therefore should not be a concern to the government.

In the end, the question is, what is the government's interest in intervening in the market? The answer has to do not with the health of individual financial firms or their shareholders -- that's the free market, y'know, creative destruction, all that stuff we heard so much of from the Masters of the Universe -- but with the role the financial industry as a whole plays in the larger economy -- the operation of other businesses, the availability of credit to individuals, etc. The government's role ought to be only the stabilization of the latter, and the individual firms should be nationalized, or supported, or allowed to collapse, or whatever else serves that interest.

The worry, of course, is that those firms have learned to game the system. They're a little like the pilot of an aircraft who holds a gun to his own head and tell his passengers to sign over all their wealth or he pulls the trigger. And it doesn't hurt them to have one of their own in charge of the Treasury and a lame-duck president and Congress who are sympathetic.

Question: is there some reason not to hurt the shareholders?

Let's see, a year ago Citicorp stock was at, what - about $50 a share? And now it's under $5? I'd say the stockholders are feeling some pain.

What am I missing?

The polite answer to your question is "capitalization." The impolite answer starts with suggesting you look the word up. From there, things get worse, so I'll stop.

One thing about this financial crisis is that there are now a whole lot of experts on "moral hazard." Something about the phrase really resonates with people -- it's become another verbal talisman, like "balance" and "appeasement." Just throw 'em out there and the argument is made for you.

Citibank shareholders deserve to get hurt, in particular the Saudi prince who is the largest shareholder, they selected the bank officers that ran the bank into the ground. A huge bank should be as safe from bank rupture as a large Vegas Casino!

markets hurting shareholders that make bad investments is for Capitalists, not for America's plutocrats who talk Capitalism, but run to the government to protect their bonuses and their bad investments.

There is one glaring consistency in all of the economic solutions offered and attempted to date. Each one is a one-off solution for a single corporation or entity. There is no continuity in government policy, no general agreement among economists, and no clear goal.

Think about this. Despite claims that the government should not simply bail out company after company, or take on bad debt, or act simply to stabilize the market, there now seems to be a general consensus that letting Lehman go bankrupt was a mistake.

Why?

I can't tell you. And I don't think anyone else can, either. In fact, I think the ONLY reason why there's a general consensus that letting Lehman go under was a bad idea is that for the first -- and so far, only -- time, everyone got a real good look at what happens downstream when something like that happens. It's not abstract anyomore, it's real, and because it's real everyone instinctively says, "Well, there must have been a better way. A Bear Stearms way. Or an AIG way."

But is that really true? I think not. The bad debt that's 'out there' isn't simply going to filter into the ground like floodwater. It's got to be accounted for, and the collapse of Lehman accounted for a chunk of it. But the rest is still out there, making every asset in the market -- and I mean everyhing, from stocks to bonds to real estate to derivatives to you name it -- of uncertain value. Until all the losses and bad debt are realized, nobody knows what anything is worth, and that's not going to change with bailouts or any other salvage operation.

To your question: no, nobody should be thinking at all about shareholders at this point. The market is down 40+%, and nobody has been forced to stay in. If you want out, get out. If you want to risk it, and I mean RISK it, then stay in. But this isn't about, and shouldn't be about, protecting shareholder equity. It should be about, and only about, realizing all of the losses that need to be realized so that we know what the hell things are worth again.

"The banking giant has been brought to its knees by gaping losses on mortgage-related investments."

Wouldn't a more accurate statement be that "The banking giant was brought to its knees by the way, way over-leveraged securities it created from mortgage debt, not only securitizing mortgages into CDOs but also securitizing the CDS, into Synthetic CDOs, it engaged in to protect itself from defaults of the mortgages underlying the CDOs."

If the economy simply had to deal with a few hundreds of billions of mortgage defaults things wouldn't be nearly at their present state.

Citigroup management, including Robert Rubin who advocated repeal of Glass-Stegall, was negligent as the NYT documented in its report yesterday.

This is a lesson on how NOT to save financial institutitons. Upper management and shareholders should loss everything in a publicly finance bailout.

Obviously Citigroup is too big to fail, letting it go under would put us that much closer to derpession. But those who made horrible decisions should pay dearly.

What bothers me is that the individuals whose professional behavior got us into this situation that requires public bailouts are walking away from this with a bundle of money. They can retire with lifestyles and assets that are unimaginable to most of us.

The lesson? This will happen again because crime pays.

Shareholders AND bondholders should get soaked before taxpayers do. That will teach them not to be such morons.

Before you start calling every shareholder a moron, you may want to consider that a lot of people have 401(k)'s, and a variety of other IRA's. I'm one of them, and I'm not 'wealthy' just trying to do the right thing by having an IRA and having some mutual funds to help me out in the future.

I think what has been overlooked is the fact that the CEO's and top management in those companies have been looting the coffers for several years now. Inflating the stock price in order to reap the benefits. Why is nobody talking about retroactively confiscating those ill gotten gains?

That is the only way that 'moral hazard' has any meaning: Hurt the top managers financially. By hurting an ordinary shareholder who happens to have a few shares in their 401(k), it looks like you're solving the problem, but the crooks are getting away non the less.

Maybe the government - run by professional managers - under President Obama, can create a Super fund and buy those banks and troubles companies and run them for us. Once they are solvent again, the government can sell them at a profit (privatizing them through IPO) Kind'a like the Capitalist/Republican mantra of leveraged buyouts; Why not allowing the Democratic Congress to buy those greedy GOP donors' companies at a bargain? In a few years, Congress sells them, and reduces the deficit, in one swell swoop.

It is not as if we don't have enough capable economists, to run those companies for the good of the country instead of next quarter's P&L statement.

Bruno is exactly right, we need some sort of government-sponsers private equity fund to get us out of this mess. By hiring professional managers, it would insulate the companies from political influence and allow the U.S. to reprivatize them eventually, hopefully for a profit.

Still, shareholders, even if they are pension funds, should lose everything. They are ultimately responsible, after all. Then the govt can move in and recapitalize the firms, and ask the govt fund to hold the shares and provide oversight of the restructuring of the failed comapanies.

I'm unconvinced that these financial concepts are beyond me.

Nor am I convinced they are beyond most of us.

I'd sooner believe we are given insufficient information to understand the economic problems we face; for if we had that information, we would never agree to most of the bailouts being proposed.

Remember how classified information that proved Iraq had WMD wasn't released?

"Fool us twice... we can't be fooled again."

There's hardly a CEO on Wall Street who doesn't belong in Guantanamo.

Koreyel: "We are investing in millionaires, so that they can remain millionaires."

I imagine that's how the Chinese have been feeling about the US for a couple of decades now.

OK, I'm going to throw my personal heresy onto the table and see if anyone responds: Is there any sane reason to allow limited liability corporations? To my eye the financial crises -- and yes, there are several concurrent ones going on -- all stem from the ability of people to move money around without being tied to the performance or indeed survival of the companies themselves. Why exactly is it good for the country -- not for the brokers, or the plutocrats, or the managers, but for the country -- that one is allowed to limit one's liability? Isn't this how we got all these failing companies that are "too big" to be allowed to fail?

SO that's my radical solution: Eliminate the LLC. Make them all go bye-bye. Make people take responsibility for the companies they run.

Bernard made a point...

SO that's my radical solution: Eliminate the LLC. Make them all go bye-bye. Make people take responsibility for the companies they run.

LLC's, S'Corps, and C-corps all serve a purpose; to protect from frivolous lawsuits and such...

Sure some people will say that there are legitimate lawsuits - which is true - but there are legitimate avenues for redress on those.

If there is criminal negligence, then no corporate protection is going to offer you cover.

But... I do see your point. Why is there no clause that allows to go after all those greedy CEO's who assume that it is normal to demand those enormous compensations packages (400+ times the average worker's wages)?

Maybe they are being sued after the fact, and we don't hear about it because it is not sensational enough?

Re-instate the up-tick requirement, and any laws needed to prevent sub-prime mortgages being issued, actually put to work Bain's plans for mortgage debt realignment using the $24B she estimated would be needed, let Citibank and whatever financial companies (who should have known better or at least what they were doing!)go under or be bought out by the firms that got the bulk of the first $240B, and hold aside enough to provide the auto companies' "bridge" if they come up with a good plan (duh?!) and offer the rest to cities, counties, states with "ready-to-go" public works projects. Also fire Paulson or at least bring him to court for helping his friends so lavishly. You might want to hold back a billion or two from the Auto companies until they sell every private jet (I think there are 12 in the 3 companies), and lower the CEO's salaries to $1 each until they prove their worth.

I don't see why hurting the shareholders is something we should be trying to avoid;

That's something that I agree with. Same with the auto companies. However, with as many pension funds as there are that own the shares, this might not be a vote-winning approach.

One idea well-demonstrated in the 20th and 21st centuries is that government interventions to keep the economies and businesses afloat don't work very well. A recession occurs when a bunch of businessmen make bad decisions at the same time, and when that happens there is no real evidence that the government employees can do anything better than wait for the better businessmen to make better decisions.

Protecting shareholders is not likely to work any better than protecting management, or protecting employees.

"...While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank..."

Um, I think we all can consider that 'mission [already] accomplished.'

1) Allow Citi to go bankrupt, and there's going to be a run on the bank. If there's a run on it, because of how banks operate the whole thing is going to collapse. Not God, not the U.S. government, not Humpty Dumpty, not even President Obama pulling out his heaviest artillery and giving a speech on hope, change, and bipartisanship, all at once, is going to be able to put it back together again. That's 300,000 jobs, and God only knows how much highly leveraged capital (and the jobs that supports) up in smoke.

2) How do you inflict bankuptcy-like pain on shareholders without forcing the company into bankruptcy? Mandate that the shares have zero value? That's rather beyond the powers of the Federal Reserve. It might -- only might -- be beyond the powers of President Obama (unless he pulls out his heaviest artillery and gives a speech on hope, change, and bipartisanship, all at once).

Once you've decided Citi has to be saved, the simplest and cheapest way to do it is now, while Citi still has something worth saving, and before Citi's continued, and very public, wobbling, undermines further confidence in the system. I know it sounds good to talk about "moral hazard," and it feels good to think that you're sticking it to the rich bastards who own Citi shares, but in the end you're only going to be sticking it to yourself.

The Treasury can't do enough to help out financials that made bad bets and then borrowed money to make more bad bets. Meanwhile, the Administration and Congress give the cold shoulder to auto manufacturers (who actually produce something, instead of just making bets). Also, I'm sure the CEOs from AIG, Citi, Goldman Sachs, et al. don't fly commercial airlines.

I know the auto industry has resisted much-needed change and made stupid decisions, but it is not a lost cause. We need to continue the R&D that will enable us to build hybrid and electric vehicles in the U.S. Plus, the impact of the job loss to auto workers and those who work for the suppliers would be worse than letting one of the too-big-to-fail banks go down.

Unfortunately, Paulson is going to keep shoveling money to his Wall Street friends who caused this crisis until he's gone. It's too damn bad we can't get rid of these guys now.

In the UK, as far as I understand it, all the banks that took substantial help or had to merge, the CEOs walked. And no golden parachutes.

I'm waiting for just one US financier to pay the cost of creating this whole effing mess.

Time for some heads to roll!

Right now I'm about ready to find some tumbrels.

JUST ONE QUESTION...WHO COLLECTED ALL THE MONEY THAT CITIBANK WENT BROKE PAYING?? WHO NOW HAS ALL THE MONEY??

JUST ONE QUESTION...WHO COLLECTED ALL THE MONEY THAT CITIBANK WENT BROKE PAYING?? WHO NOW HAS ALL THE MONEY??

Citi did the same thing as all the other banks that have been feasting at the bailout trough---they went on a shopping spree.

Period.

If you list the names of the top 20 Citi shareholders, you will answer the question: Why this bailout?

I'm thinking hostile takeover. Citi is worth 4 bucks a share; buy it for $5, fire all the executives, cancel their bonuses and blacklist them from ever working in banking, finance or any corporation that holds government contracts.

Then, sell off the assets to the highest bidder and pay for any losses by retroactively quadrupling the capital gains tax.

Citi Residential/ aka Ameriquest is still agressively trying to foreclose on my house. Who the hell is going to bail me out? Every time I call with new revelations in the news about Citi....that doesn't pertain to you.
No adjustment
No care. Just pay the outragious amount or be on the steps of the courthouse to see your house get auctioned off.
If the government is going to give these crooks billions of dollars they need to oversee where the money goes and make sure honest peoplein trouble get helped, not just the executives from Citi and the stockholders.
Since Citi Residential is the bastard stepchild of Citi, they apparently go by different rules.