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Much of the crisis in the banking industry has been blamed on the inaction of the boards of directors at companies including Bank of America (BAC) and Citigroup (C). Some of Citi's most prominent members have left, probably not entirely of their own volition. The board at B of A has been savagely attacked over the last several weeks because it did not insist on better due diligence in the buyout of Merrill Lynch and for allowing large bonuses to be paid to employees after the firm had taken TARP money...
...Sources say the Federal Reserve would prefer to let the banks keep the loans and troubled bonds for now and instead provide the banks with insurance policies guaranteeing that the government will swallow a good deal of future credit losses. But a similar deal that the Fed struck with Citi did little to boost that company's stock or stave off fears that it may soon go under...
Another problem is lack of flexibility. Citigroup is just protected against losses in the $300 billion portfolio it sets up with the government. Any losses outside of that loan group are all Citi's. As a result, some investors are worried that Citigroup even with the new guarantees won't have enough capital pay for the loan losses it will have to realize. By some estimates, Citigroup's shareholder capital could be wiped out if just 2% of its loans go unpaid...
...Five Questions (and Answers) About Citi's Bailout...
...modern world simply isn't prepared to survive a financial shutdown. But handing banks cash and hoping things will work out is no solution either. What's needed is a new beginning: new management, new investors, new boards of directors, in some cases new institutions. That's how Citi, and the financial system in general, returned to health in the past. And that's what the next stage of the bank bailout will have to emphasize if it's going to stand a chance of success...