Tuesday, June 16, 2009

Bailout Nation: Was TARP Just a Ruse to Protect Citigroup?

With JPMorgan, Morgan Stanley and other big banks reportedly set to start repaying TARP funds as early as tomorrow, many are ready to turn the page on this sordid chapter in our nation's financial history. But Barry Ritholtz, CEO of Fusion IQ and author of Bailout Nation, is still trying to figure out why we went through the whole exercise in the first place.

In his new book Bailout Nation, Ritholtz discusses the possibility that TARP was all a giant ruse, "a Hank Paulson engineered scam to cover up the simple fact that Citigroup was teetering on the brink of implosion," has he writes in his popular blog The Big Picture. "A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks."

We delve further into this theory in the accompanying video. While it can never be fully proven, Ritholtz's "just a ruse to protect Citi" idea seems plausible given:

- The reaction of many other banks forced to take TARP funds;
- The extraordinary level of bailouts and debt guarantees aimed specifically at Citi;
- Regulators' fears last fall about the "systemic risk" if a big bank were allowed to fail.

We also discuss the future prospects for Citigroup, the company and the stock, now that other banks are coming out from under TARP. Ritholtz believes one of two courses is likely: Either Citi will need and get more bailouts or the government ultimately puts the bank into receivership.

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