NEW YORK — Taxpayers may be wondering why they’re forking over more money to rescue yet another behemoth, Citigroup, even as their own nest eggs crack and jobs evaporate.
The answer is that Uncle Sam believes letting Citi fail is unthinkable.
The government has decided that guaranteeing hundreds of billions of dollars in possible losses and injecting $20 billion more into Citi trumps the alternative: a panic that could leave retirement accounts and investment portfolios of millions of Americans in tatters and shove more people out of jobs.
Whether the government’s rescue of Citigroup Inc., announced Sunday, will ultimately prove a good deal for taxpayers is hard to tell. In part, that’s because no one seems sure what Citi’s troubled assets are actually worth.
If the gamble pays off, Citigroup would be back on firm footing, unhinged financial markets would recover and taxpayers would turn a profit as the government will get $7 billion in preferred Citigroup shares as part of the deal. If the gamble doesn’t pay off, taxpayers would take a hit. And they would possibly have to rescue still more huge financial institutions, digging the bailout hole even deeper.
“It is way too early in this crisis to say whether it is a winner or a loser,” said Cornelius Hurley, a Boston University law professor. “I don’t know if I am exhilarated by the prospect of being a shareholder in Citi or AIG. I’d rather have the money in my 401(k).”
Back in 1979, the U.S. guaranteed $1.2 billion worth of loans to Chrysler. When the automaker rebounded four years later, the government reaped more than $300 million in profits.
The Bush administration has decided that Citigroup, insurer American International Group and mortgage giants Fannie Mae and Freddie Mac are indeed too big to let fail.
Yet Treasury Secretary Henry Paulson has opposed using money from the $700 billion financial bailout to help teetering Detroit automakers or financially troubled homeowners. The bailout money, he said, was intended to stabilize the fragile financial system.
The case for rescuing Citigroup, a company with 200 million customers and operations in more than 100 countries, may be more persuasive than the case for smaller banks whose reach doesn’t extend far. Still, the government action makes other financial companies more likely to seek federal aid.
President Bush held open the prospect Monday of similar arrangements should other companies falter.
The Treasury and the Federal Reserve are exploring using some of the bailout money to bankroll a new loan facility to help companies that issue credit cards, make student loans and finance car purchases.
The deal doesn’t get rid of Citi’s top management, however.
“If you’re going to ask for a government bailout, you ought to tender your resignation,” Hurley said.
