Singing the blues

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: Troubled Asset Relief Programme, or TARP. This may have been unavoidable, given the ferocity of Citi’s decline. But it sows uncertainty, just weeks after the government attempted to bring more coherence to its bail-out policy.

Third, it is not big enough to guarantee that Citi can avoid returning to the trough. The cloistered $306 billion includes the bank’s most noxious holdings, such as mortgagesand leveraged loans. But its huge credit-card and overseas-loan portfolios remain outside, and are degenerating fast. Nor are Citi’s off-balance-sheet exposures-$1.2 trillion at the end of September-included. Some facets of the deal look like smoke and mirrors. It releases $16 billion in regulatory capital to Citi, by giving a generous 20% risk-weighting to the partially insured assets (previously booked at 100%). As a result, it will have to hold a mere $5 billion of tier-one capital against 60 times that in questionable debt, on which it must bear the first $29 billion in losses.

Last, the rescue does nothing to establish a clearing price for the impaired assets on banks’ books. This was the original aim of the TARP, using auctions, but it was dropped earlier this month in favour of direct capital injections. Officials would like to see Citi and others using their excess capital to buy securities cheaply in the secondary markets-in other words, to take on the role the government abandoned. For the time being, this is a vain hope.

Imperfect though it is, the rescue appears to have been designed to be used as a template for future interventions. “This is now the most effective way to show our commitment,” insists an American financial regulator. It may also be expedient for the Treasury, which has only $20 billion left from the first $350 billion tranche of the TARP-Congress is yet to release the second half-since the new approach rests primarily on insurance, not hard cash.

But is it the right approach? Some would have preferred to see Citi hive off its troubled assets into a separate bad bank”, tasked with disposing of them in a way that minimised downward pressure on financial markets. This approach worked well in several past financial crises, including Sweden’s in the 1990s (see article). In this one, it has been used to unburden UBS of up to $60 billion of dross, which will be managed by the Swiss central bank.