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Did Hank Paulson Use TARP as a “Ruse” to Rescue Citigroup?


Be sure you’re sitting down before you read this, Okay? Barry Rithholtz speculates in his forthcoming book, Bailout Nation that the entire multi-trillion dollar boondoggle was

a giant ruse, a Hank Paulson engineered scam to cover up the simple fact that CitiGroup (C) was teetering on the brink of implosion. 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.


From the book:

As of October 2008, the other banks, while somewhat worse for wear, neither wanted nor needed the capital injection. None of them were in the same trouble as Citi. Even Bank of America’s problems via Merrill Lynch wouldn’t become acute until December 2008. Washington Mutual, the most troubled on the list, had already been put into FDIC receivership the month before.26 JPMorgan bought WaMu from the FDIC for under $2 billion, and Wachovia was swept up by Wells Fargo for about $15 billion. Thanks to a change in the tax law, Wells Fargo got to shelter $74 billion in profits from taxation. Instead of the FDIC absorbing a few billion in losses from Wachovia’s bad assets, the taxpayers lost 35 times that amount.

According to Rithholtz, today’s news that ten banks are going to pay back the TARP funds provides support for his thesis:

The hurry to repay this cheap cash confirms that the fix was in. If these banks were really in the bad shape Paulson suggested, they would hold onto this cheap source of credit. Instead, they want to throw the yoke of government monies off as soon as possible. The desire to return to their old compensation packages for executives cannot be the only factor . . .

In other words (or as President Obama would say, “Let us be clear”) our government spent $2.25 trillion and put our social safety net and maybe even the future of our country in jeopardy in order to rescue one huge bank that should have just been allowed to go bankrupt. I think I’m going to scream now.

Rithholtz went into more detail in an interview with Bloomberg Radio yesterday. You can listen to it here. In the interview, he makes the argument that huge corporate bailouts always seem to happen in election years. {{Sob!}} There’s a little good news in the broadcast, I guess; since Rithholtz says that while things are still getting worse, it isn’t happening as quickly as before. He thinks maybe we are going to pull out of this without falling all the way into another Great Depression.

Oh goody. But I’d feel a whole lot better about that prediction if I could see any sign that the government cares even a tiny bit about jobs and health care and such mundane needs of ordinary people as opposed to protecting banksters from their own stupidity and greed.

(See also Dakinikat’s post from earlier today.)

UPDATE: The Wall Street Journal has a new article in which they argue that Citigroup should be broken up.

Resolving Citi — by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up — wouldn’t be cheap, but it would have a number of benefits. It would remove the leading candidate for zombie-bankdom from the financial system. It would also, finally, put an end to the slow bleeding of taxpayer money into the bank.

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52 Responses

  1. Meet the new boss, same as the old boss.

  2. Every day it just gets worse and worse. This is treason.

    • Yep, they should all be prosecuted, every single one of them–especially Hank Paulson and Larry Summers.

    • If Paulson used tarp as a ruse to bail-out citicorp, what was Obama’s excuse for his “stimulus package?” I don’t think we’ll ever know the honest answer for how the billions/trillions were used.

      • How much did he get? This is like the bank robbery via the front door with everyone waving to them (including the security guards) as they take off with the money. 😯 {{{yelling}}} AAAAGH!

  3. Absolutely! Remember when “they had to have the money by midnight tonight” or the world was going to collapse?

    I call BS.

    This whole thing has been such a joke – give our money to “their” friends” and then make it look like they’re doing us a favor.


  4. !! I’m home!!

    BostonBoomer, this is a GREAT post.

  5. I’m not so sure that I can accept Rithholtz’s theory just yet. When he says something like this:

    If these banks were really in the bad shape Paulson suggested, they would hold onto this cheap source of credit. Instead, they want to throw the yoke of government monies off as soon as possible. The desire to return to their old compensation packages for executives cannot be the only factor . . .

    I can’t help but think to myself, but why couldn’t that be the only factor? Isn’t that about the only thing that motivates these greedheads?

    But I’m certainly no expert in this area.

    • I mucked up the blockquote coding, but I think you can figure out which words are mine.

      Btw, a fascinating post, Dr. Boomer!

    • I think once they saw all the strings–especially the ones linked to bonuses and compensation and dividends–they decided it wasn’t a good deal. That wasn’t in the original deal. It was changed later.

  6. GRRRRRRR…..i’m trying very hard to censor myself..

  7. BB: you might want to look at this


    One possible answer is a new mechanism for regulators to resolve — that is, seize, then sell or recapitalize — the biggest banks. But while we’re waiting, one way to minimize the too-big-to-fail assumption is by showing that at least one big institution can fail. Last fall, at the height of the panic, regulators deemed this too dangerous. But this need not be an eternal truth.

    It happens that we have a test-case at hand in Citigroup. Regulators remain at odds over how much trouble Citi is in. But this spring’s stress tests revealed Citi to have a $63 billion hole in its balance sheet, which the feds papered over by giving the bank credit for converting its government-owned preferred into common shares, a move that will put no new money into the bank. Citi has also been slow to raise private capital since the stress-test results were revealed, even as the capital markets have opened up to its competitors. More broadly, Citi has proven itself unmanageable by having already failed three times since the 1980s, requiring government bailouts in one form or another during the sovereign debt crisis in the ’80s, the 1990s real-estate bust and again, twice, during the panic of 2008. Its turnaround plan has also been less than impressively executed.

    The FDIC has been agitating for changes to Citi’s top management, but we think there’s a case for going further.

  8. http://news.yahoo.com/s/ap/us_obama_budget

    Obama: It’s OK to borrow to pay for health care

    Obama’s proposal would require future tax cuts to be financed by tax increases elsewhere. But again, he carves out several exceptions, including for an extension of Bush’s tax cuts due to expire in 2011 and relief from the alternative minimum tax.

    • Yeah, and he also feels its okay to tax us for it too! While he reamed McCain in the debates for that, he’s now suggesting it. And he’s better than McCain and Hillary how again?

      • I just keep reminding my Dem representatives about BamBam’s pledges of not taxing the middle class and that by supporting said tax increases they will lose in the midterms.

  9. OT but very funny! Biden aims a verbal torpedo at Sotomayer while trying to support her … file this under the heading of with friends like these who needs enemies … but that appears to be Biden’s mo!


    • Oh no! He’s such an embarrassment.

      • BB, such blasphemy! Don’t you recall, Biden was the first decision as “almost POTUS” that BO made and he had superior judgment.

    • Here’s another from the Biden gaffe machine.

      Biden gaffe: New rail tunnel being built for cars?


      • “Look, this is designed, this totally new tunnel, is designed to provide for automobile traffic,” Biden said. “It’s something, as you know, up your way, that’s been in the works and people have been clamoring for for a long time.”

        For the record, the tunnel is for trains, and its completion would allow for more NJ Transit trains during peak hours and “one-seat” rides into Midtown Manhattan on lines serving Bergen and Passaic counties. Currently riders on those lines must switch trains.

        Biden’s office did not immediately respond to a request to clarify his comments.

        Jeffrey Tittel, executive director of the New Jersey chapter of the Sierra Club, renewed his criticism of the tunnel. Rather than go to Penn Station and connect with Amtrak and the Long Island Railroad, NJ Transit will build a new station built 180 feet below 34th Street, or, as he calls it, “Macy’s basement.”

        “It’s going to be hard to get those cars up 180 feet of escalators,” Tittel said.

        • it’s pretty bad when you can even screw up ceremonial duties, isn’t it?

          • you if notice every time biden say something stupid the send him away somewhere . i wonder where the sent him this time maybe one of the fact finding mission to the north pole. lol

  10. This makes me want to break something. No, don’t touch new monitor, you like your new monitor… grrrr

  11. In upbeat news, Red Sox shut out Yankees, 7-0.

    • Thanks, but I am always wondering why they make black backgrounds on things people want to read? It makes it very hard to read, but looks very tri schiek , but again, I need to read it.

  12. It’s a great site but check out the video and Corzine speaking at a gay pride event.

  13. If bailing out Wachovia would cost only a few billion, why was its acquistion worth $74 billion in write-offs to Wells Fargo? The author is clearly confused here.

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