Tuesday, November 25, 2008

Why Washington bailed out Citigroup

(G&M Streetwise) Why exactly does Washington see Citigroup as too big to fail?

Well, according to the International Monetary Fund, that's about 1.5 trillion reasons to keep the bank going. In looking at the U.S. government's weekend bailout of Citigroup, analysts at TD Waterhouse stumbled on an IMF report that looked at systemic risk in the derivatives market if a major global bank went bust. This sort of analysis, involving looking over the edge of the abyss, is taking place at all sorts of regulatory groups these days.

“According to a recent working paper by International Monetary Fund staff, the failure of a single major financial institution could result in losses to the over-the-counter derivatives market of $300-$400 billion (U.S.),” said TD Waterhouse in a report Tuesday. “In addition, since such a failure would likely cause cascading failures of other institutions, the total global financial system losses could exceed $1.5 trillion.”

“Not to take the shine off of equity investors, but the fact that Citigroup needed to be bailed out is not exactly a vote of confidence that the credit crisis has stabilized,” added TD Waterhouse.

In the past, one of the great strengths of American-style capitalism was the country's ability to recognize failure, let companies go bust, and move on. It's a telling sign of a change in attitude towards government's role in the economy when the Citigroup rescue wins praise, and the decision to let Lehman Brothers fall is widely seen as a mistake.

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