We were reminded again that we are not guaranteed gains. Yes, there was a broad rally, financials leading. It was the first two-day rally this month. Commodities rallied as well, as did commodity stocks.
But the Dow, which was up as much as 552 points with 15 minutes to go, dropped 150 points in the last few minutes. Still up, but a reminder of the volatility. Is Citi the template for big banks? AIG had to be renegotiated, the TARP is being used for purposes that were not advertised.
The question today is, with the new Citigroup bailout, has the Fed finally found a template for dealing with losses at the big banks? Can it afford the template?
The government plan for Citi has six components:
1) Wall off assets;
2) Make the institution absorb the initial losses;
3) Then let the government absorb the bulk of the losses (in this case, the government backstops 90 percent of the $306 billion);
4) Make the institution sell senior preferred shares at some percentage of the size of the troubled assets;
5) Cap the common dividend at a nominal amount ($0.01 per quarter);
6) Give government input into executive compensation.
The hope of the bulls is that this is the successful template, and that we have seen the last of the big bank failures (Wachovia, Washington Mutual, Bear Stearns, Lehman Brothers, AIG and IndyMac) this year.
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