With a new weekend pledge of more than $300 Billion in guarantees to Citigroup, the Treasury is sticking its neck out to protect the American economy. Is this the best move?

Those who know how to win are much more numerous than those who know how to make proper use of their victories.
Polybius (205 BC - 118 BC), History

It would appear that it is a sound decision, even if it turns out to be an expensive one. Treasury is giving Citigroup an additional $20 Billion, on top of the $25 Billion already given from TARP (Toxic Asset Relief Program) in October. The rest of the pledge includes FDIC guarantees, a protection against losses of about $306 Billion worth of loans and securities on Citigroup's books. In addition, Treasury worked out over the weekend a Federal Reserve backstop to any additional risk through an offer of a non-recourse loan.

The additional $20 Billion is being invested in Citigroup, with an 8% dividend on preferred shares. That being said, the Government is not taking over Citigroup, nor is it doing the same as it did with AIG. No conservator is being put in place, though calls for Citigroup's management to leave are coming in from many quarters early this morning. Government officials

Unlike AIG, Citigroup is relatively healthy, with a solid balancesheet. Like many other banks in its class, it holds a number of bad loans and mortgages, resulting in some difficulties, but it is not expected that these troubled assets pose any systemic risk to the company. There simply was no need to nationalize the bank. Such a move could set a very negative and expensive precedent.

Though it has recently pulled from sale its treasured broker business, Smith Barney, other assets are now up for sale. This is not, of course, the best time to be selling assets, and we expect it may take some time to close many transactions at a fair value. The last thing Citigroup should do now is sell at bargain basement prices those assets they've invested more in to build than they could fetch.

The requirement of cash must be tempered by the prudent realization of true value and worth. This is quite the problem facing homeowners and banks across the nation. What is an asset really worth today? Appraisers are having a very difficult time of this, and banks are often discounting even the substantiated written appraisals of the professionals.

Because the bank operates globally, in just about every country, it is of national concern to financial leaders in Washington and abroad. Its survival is critical, not only to national pride, but to the potential losses it could create internationally, should it fail. This is one of the reasons we've been proposing isolation of individual national banking divisions from the parent bank. What happens in one nation, should not impact the net worth or operation of the bank in another.

Despite a week long effort to tell investors that their capital position is strong, there has been a loss of confidence in public markets for Citigroup stock, which dropped precipitously last week (-60%) to $3.77. Loss of confidence in management and the board are further eroding Citigroup's value and in our opinion, there will be some severe changes, swiftly, in both.

A merger is unlikely as few banks have the liquidity today to engage in such a move. Mergers with some other bank corps such as Morgan Stanley or Goldman Sachs would result in overlaps causing massive layoffs, which are an undesirable consequence.

In the deal, Treasury and FDIC did secure certain assurances, such as enhanced executive compensation restrictions and a mortgage modification program.

The questions arise out of this deal, when will it end and how much will this crisis cost? While it is unlikely to bankrupt the US Government, continued large scale bailouts and backstops could endanger the nation's financial condition for decades.

As for Citigroup, it is now reasonably secured and hopefully, its value will being to reflect the assurances and guarantees at its back.