Taming a Wild Child

Citigroup needs tough love from its favorite uncle, but judging from details of the federal government's latest bailout, Uncle Sam seems more than willing to enable more bad behavior from this Wall Street brat.

The government will rescue Citigroup by backing up to $306 billion in loans and securities and injecting $20 billion directly into the company. That's in addition to $25 billion Citigroup received earlier. With Citigroup's losses, charges and write-downs mounting - $65 billion and counting - and with its stock collapsing, the government had little choice but to save the nation's second-largest bank.

But the government got precious little for the money. The government will require Citigroup to absorb the first $29 billion in further losses on its troubled assets; the government gets tagged with most of the rest. The government gets up to $7 billion in preferred shares of Citigroup stock. Citigroup agrees to modest restrictions on executive pay and to work with a Federal Deposit Insurance Corp. plan to help homeowners avoid default.

Management remains. The board of directors pays nothing for its failures.

It wouldn't be quite so bad if this was the first time Citigroup had gotten in trouble.

But Citigroup long has been the wild child, plunging into perilous games such as Internet stocks and loans to developing countries and subprime lending. Citigroup needed a bailout in the 1980s after Mexico became insolvent; in the early 1990s, the government effectively bailed it out again with a series of well-timed interest rate reductions; it was criticized after one of its research analysts was accused of pumping up the telecom bubble; it faced accusations of regulatory violations in Britain and Japan; it played a role in propping up the notorious Enron.

And, of course, it pushed for repeal of the Depression-era Glass-Steagall Act during the Clinton years, which enabled banks to expand far beyond their traditional businesses and led directly to Citigroup's current troubles. President Bill Clinton's Treasury Secretary Robert Rubin, who lobbied hard for repeal of Glass-Steagall, later left government to work for Citigroup. Rubin is one of many who has some explaining to do.

How many times must a bank fail, how many dollars must it lose, before management is sacked? Sixty-five billion dollars, apparently, is still not quite enough.

Treasury Secretary Henry Paulson should have demanded that Citigroup's management and board be thrown aside. Instead, Citigroup effectively got sent to bed without its supper. What it really needed was a trip to reform school.

REPRINTED FROM THE MILWAUKEE JOURNAL SENTINEL.

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