Troubled Banks Back at Square One

Obama obtains TARP money; Citigroup to break up

By Mark Huffman
ConsumerAffairs.com

January 16, 2009
In spite of the U.S. Government investing $350 billion in U.S. banks since October, the U.S. still has a banking crises. At the request of President-elect Obama, Congress has voted to release the remaining $350 of federal bailout money.

The banking sector's continued problem was highlighted Friday in earnings reports by Citigroup and Bank of America, two of the nation's largest banks. Citigroup reported losses of $8.29 billion in the fourth quarter of last year.

Bank of America lost $1.79 billion in the same period. Both banks continue to be dragged down by their investments in mortgage backed securities, which now have little or no value because of the increasing number of mortgages that are in foreclosure.

In a drastic measure, aimed at regain its financial footing, Citigroup says it will split itself into two companies. The new company, Citicorp and Citi Holdings, will not own any of the so-called "toxic" assets.

The Treasury Department is considering a similar move for the industry as a whole — setting up a so-called "bad bank" that would own and hold other bank's toxic assets. That would allow troubled banks to restart, with a clean balance sheet.

That, indeed, was the original stated purpose of the Troubled Asset Relief Program. Amid much controversy, Congress in October hastily passed the $750 billion in funding, with the understanding that the Treasury Department would buy up unmarketable securities from troubled banks.

Only later did Congress learn that the Treasury Department instead used the money to purchase stock in the banks. Treasury Secretary Henry Paulson explained the urgency of the situation required immediate injections of capital into the banking system.

$350 billion dollars later, however, the problem appears to persist and industry analysts say the original intent of the TARP program should be carried out.

"Buying toxic assets from banks is a good thing because I think confidence comes back into the banking system when you are certain — or more certain — that you have no time bombs ticking," Josef Ackermann, chairman of the Institute of International Finance, told Bloomberg News.

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