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Treasury sees more big bank bailouts

By Patrice Hill (Contact) | Thursday, January 8, 2009

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The Treasury has quietly opened the door to more bailouts of major banks like Citigroup that the department deems too big to fail, exposing taxpayers to potentially large losses on the banks' souring loan portfolios.

In a little-noticed move on Friday while many people were still on holiday vacations, the Treasury issued regulatory "guidelines" saying it would take the same steps to prevent the failure of other major institutions, as it did with Citigroup in December. At that time, it provided the New York bank with a second large cash investment of $20 billion out of its bank bailout fund, and said it would share losses on $306 billion of the bank's gigantic portfolio of toxic loans.

The Treasury said it will limit such assistance to "systemically significant financial institutions that face a high risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets."

It will use "extreme discretion" in selecting which banks to rescue, Treasury said.

Some financial analysts say the department has opened up a can of worms by effectively putting a government guarantee behind "zombie banks" that are essentially insolvent, while putting taxpayers at risk for giant losses on the potentially unsalvageable loans that are at the heart of the banks' financial problems.

"This program will likely be used to offer similar 'guarantees' when Bank of America, Chase, Wells Fargo, Goldman and Morgan Stanley show up hat-in-hand on taxpayers' doorsteps," said Rolfe Winkler, a financial analyst with Option Armageddon, a Web site chronicling the mortgage crisis.

"None of our major banks would still be standing in the absence of the herculean bailout efforts by the Federal Reserve and Treasury over the last four months," Mr. Winkler said. "Committing hundreds of billions - or trillions - of dollars to 'stabilize' companies that are already effectively dead will only put huge tax burdens on future generations."

All of the big banks possess large portfolios of bad loans that they either originated themselves or acquired through government-blessed mergers in the past year and a half. Bank of America had relatively few loan troubles itself before it took on substantial loan problems with the acquisition last year of Countrywide, the nation's biggest mortgage lender and leading subprime originator, and Merrill Lynch, a leading underwriter of aggressive loans.

Wells Fargo also acquired massive exposure to California mortgages with some of the highest default rates in the nation when it took over Wachovia Corp. in a government-arranged marriage in the fall. And JP Morgan Chase took on the toxic liabilities of Bear Stearns last spring and Washington Mutual last fall in government-sanctioned combinations.

While the mergers greatly expanded the acquiring banks' shares of the nation's banking market, they put in jeopardy the banks' own good credit ratings and stability in a way that makes them vulnerable to the mounting losses on home loans as well as credit cards, commercial real estate and other trouble spots in today's economy.