“To be consistent with the last few government interventions, I don’t think Citigroup’s going to be allowed to fail,”

Here's a post on Bloomberg about Citigroup. I'm going to focus on a few points:

“Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

“To be consistent with the last few government interventions, I don’t think Citigroup’s going to be allowed to fail,” said William Fitzpatrick, an analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn’t own Citigroup shares. “This company’s too intertwined with the rest of the financial system to allow any further deterioration.”

Notice two points:
1) Too big to fail.
2) Government intervention follows from earlier actions because of consistency expectations. This is a part of Political Economy that is hard to describe, because it flows from the particular circumstances of the event. That's the point I was trying to make about the automakers bailout.

“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients yesterday. “In situations where the government has stepped in, the equity holders have not fared well.”

In other words, the downward movement of the price of the stock is because investors believe that their interests will be compromised by government intervention. Oddly, one can imagine government intervention helping the whole market, but hurting the stock of the company being helped out.

Plan B Is We're Screwed

ChumpChanger gets the picture:

"The consensus wisdom emerging about the Big 3 automakers is "Let 'em fail." There are some awfully good arguments for this. Yes, what's happening with the automakers is their own fault, the consequence of decades of bad decisions. Yes, to extend the bailout beyond the financial industry invites every ailing business in the country to run to the bailout trough. Yes, the shock therapy of bankruptcy may be the only way to make the US auto industry viable in the long run.

But what other choice is there? This is not a rhetorical question. I really don't know. It's easy to say that we should let them fail. But if John Dingell stares down at you (and I've sat in the audience when Dingell's stared down from his elevated perch--trust me, you can go many years without seeing a stare as blood curdling as his) and asks what your plan is for all the autoworkers who are going to be displaced, what's your answer? It seems to me that at the moment we have none. And anyone who says we should just let the industry go bankrupt and let it sort and downsize itself out had better have some answer to this.

PS: If you want to get some historical perspective on the dialogue here, check out A Step Toward Feudalism: The Chrysler Bailout, a paper from back in 1980 that the Cato Institute has put online (points to them for not just throwing out the sillier stuff when they were digitizing the archive). We bailed out Chrysler and the nation survived -- though it did mean years of listening to Lee Iacocca's turnaround story. "

Well, you and Cato both have a point, because that's how the world works. On the one hand, we aren't the USSR, on the other hand, government intervention leads to more government intervention. In the case of Chrysler, the terms should have at least been more onerous, including a vow of silence from Iacocca, even though I don't believe in vows for myself.

So, in this case, you're right again. There's no Plan B for any of this, because everyone's been working under a system of implicit and explicit government guarantees, based partly on the past government interventions. We're in a huge bind because of this, and are having to intervene to attempt to lessen an outright panic against risk.

On the other hand, Cato is right. We need to get out of this government guaranteed system, or at least radically alter it, because those guarantees made this outcome more likely.

So, you're both correct again, because that's the way the world works.