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      A lot of mistakes come from assuming rationality means “thinks the same way I do” rather than “reasons from premises I might not share.” Left than 1/1000 economists predicted the financial collapse, because they reasoned from assumptions like “the market is self-correcting” or “housing prices never go down.” (Sometimes both at the same time, which is rarely […]
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Did Hank Paulson Use TARP as a “Ruse” to Rescue Citigroup?

TheScream

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.

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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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