Treasury Secretary Henry Paulson was interviewed a week ago Thursday on the PBS NewsHour. He began with this whopper—

JIM LEHRER: Is it correct to say at this point, Mr. Secretary, that the $700 billion rescue plan has not worked?

HENRY PAULSON: Oh, I wouldn't say that at all. I would say quite the opposite, that what we've been able to do since that legislation has been passed is stabilize our financial system....

Of course he hadn't discussed this at the time with Vikram Pandit, chief executive officer of Citigroup, until recently the nation's largest bank.

Citigroup has dominated the news for the past couple of weeks because its stock has plunged into the near-worthless zone as it shed employees by the tens of thousands.

Once again the news media (and apparently the Secretary of the Treasury) seem to have been taken by surprise. How can this be?

Almost six months ago Pandit announced that Citigroup intended to (try to) sell off from $400 to $500 billion of assets. That's a half a trillion dollars and represented over 22% of the bank's total assets at the time. Not being an economist, a financier, an investor or an accountant, maybe I'm naÏve. But when the company stated in effect that it needed to convert a half-trillion in assets into cash, the only thing that amazed me was that there were no lines of investors waiting to dump the stock that day.

But look at this headline in Friday's NY Times: "Woes at Citigroup Began With Failed Bid for Wachovia." Citigroup's attempt to buy Wachovia came in September—just two months ago. The Times reporters must have been on assignment in Tibet during the events that preceded.

In September I wondered how a bank this deeply troubled could be attempting to buy Wachovia, which was breathing its last gasp. What Citigroup really wanted was Wachovia's consumer deposit money—which should have scared the bejesus out of the FDIC, which has to guarantee those deposits. Instead the FDIC was on the verge of taking on additional responsibilities to help facilitate the deal. Happily, Wells Fargo bought Wachovia from under the nose of Citigroup and let the FDIC off the hook.

Today's bailout

It is reported that since his appearance on the NewsHour Secretary Paulson did find time for a little powwow with Pandit. So yesterday the Treasury Department announced it was coming to Citigroup's rescue.

Here's the package as Eric Dash tells it—

Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.

What a deal! But guarantees against further losses will not be enough. What Citigroup really needs is cash. So in addition to the $25 billion the Treasury has already put into Citigroup,

... the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.

I'm not sure an extra $20 billion will cover the cost of executive manicures.

So with the bailout of Citigroup, has Paulson finally "stabilized" the financial system?

In the view of some, there is really no fundamental problem with the system. Today's bailout, like those that preceded it, is basically a psychotherapy session for depressed investors—

“Job one is to continue to repair the psychology of this market, and the bailout or the help for Citigroup is an important part of that puzzle,” James Dunigan, managing executive for investments at PNC Wealth Management in Philadelphia, said on Bloomberg Television.

Once lenders, investors (and consumers) get their heads on right, all will be well.

But Mohamed El-Erian of Pimco holds a more appalling view—

... this is a crisis of the system, not a crisis within the system, but a crisis of the system.

And that's why it's global in nature, indiscriminate in impact, and consequential in outcome.

Let's face it, a helluva lot of money has just up and vanished. It was for the most part money that was generated in the financial system for the benefit of the financial system. But in any case, it isn't coming back soon, if ever.

James Bruges concludes that such concentrations of finance-generated wealth "must inevitably be corrected from time to time with revolution, wars or economic collapse."

Take your pick from the above. On this test multiple answers will be accepted.

Tags: news and politics banking finance recession economic depression