Massive Citi bailout shows credit crisis continues to flare up

I had hoped we’d seen the last of the mega-bailouts in the financial sector.

But last week, when Citigroup Inc.’s stock price collapsed, it was clear something would have to be done. We’d seen this scenario before: American International Group, Lehman Bros., Washington Mutual and more.

All saw a massive evaporation of shareholder value just before bailout, bankruptcy or forced merger.

Just eight weeks ago, Citi was to be Wachovia’s rescuer. The sprawling financial supermarket, with the federal government’s encouragement and dollars, would prevent what some feared was a meltdown in the making.

Then Wells Fargo topped Citi with a deal to acquire Wachovia that was richer and less dependent on federal help. I can remember thinking at the time that maybe it was better for Citi not to inherit the problems that had plagued Wachovia.

Instead, Citi’s own stresses prompted federal regulators to write another big check.

That Citi could go from hero to zero so quickly should serve notice that the credit crisis is not simply a subplot to this recession.

The captains of the auto and home-building industries campaign publicly and loudly for billion-dollar loans to prop up their broken companies. I worry about what we won’t hear: the fears being expressed in bankers’ boardrooms and financial regulators’ war rooms about liquidity and capital adequacy.

Our nation has committed trillions to stabilizing the financial sector in 2008, trying to restore confidence in the banking world.

But if Citigroup can have a near-death experience after receiving $25 billion in capital less than a month ago, I’m far from confident.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, said the nation is “navigating through uncharted territory in the scale of the economic and financial crisis and the magnitude of the government response required to contain it.”

The credit crisis continues to spawn wildfires. One week, it’s life insurers buying banks to gain tickets to Washington’s Bailout Ball. The next, it’s Citigroup.

From here, it doesn’t look like we’ve got the blaze under control.

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