Singing the blues

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: When Citigroup was formed a decade ago, in a merger that reshaped banking, the deal’s architect, Sandy Weill, basked in the limelight and admitted to feeling like a rock star. The boss these days, Vikram Pandit, must feel more like a busker. Humbled by a devastating, Lehmanesque run on its shares, Citi has become the latest, and largest, financial institution to need rescuing. The giant bail-out gives the bank breathing space. But it also leaves Citi in what a prominent financier calls a “financial no-man’s-land”: still too leveraged for comfort and too cumbersome to manage effectively, yet far too big to fail.

The rescue comes in two parts: it provides $40 billion in fresh capital and capital relief, and it ring-fences $306 billion of illiquid assets on Citi’s $2 trillion balance-sheet. The bulk of any losses on these, beyond the first $29 billion, will be borne by government agencies. One official describes the arrangement as “catastrophe insurance” for Citi. The deal, a new version of intervention in a crisis that has already seen a few, is the strongest sign yet that the government will do whatever it takes to maintain confidence in banks, says Torsten Slok, an economist at Deutsche Bank.

The immediate benefit is to reinstate Citi as a trusted trading partner: though there was no doubt it would be propped up, clients had begun to pull money. And the loss-sharing agreement leaves the bank with a substantial capital surplus, if (a big if) you trust the way it values its dodgier assets. But the plan, crafted in a hurry over a weekend, has several flaws.

Ain’t no sunshine

First, no one has been forced to take responsibility for Citi’s woes. Keeping Mr Pandit on was understandable: in the job for less than a year, he was dealt an awful hand. But the longer-serving board has plenty to answer for; and Robert Rubin, formerly head of its executive committee (and close to both outgoing and incoming treasury secretaries), encouraged its disastrous foray into collateralised-debt obligations. Shareholders also get an easy ride.

Losing the dividend for three years is a small price to pay for not being all but wiped out, as has happened in previous rescues, such as that of American International Group, a giant insurer, and Fannie Mae and Freddie Mac, the two vast mortgage agencies.