Bailouts Round II

Hours after the Senate released the second half of the TARP funds yesterday, Bank of America had a second helping, receiving a $20 billion infusion and a government guarantee on $118 billion of potential losses. According to The New York Times, the problem with the Bank of America bailout, like the earlier $300 billion Citigroup bailout, “is that it is likely to conceal the amount of risk that taxpayers are taking on. If the government-guaranteed securities turn out to be worthless, the cost of the insurance would be much higher than if the Treasury Department had simply bailed out the banks with cash in the first place.” The Times goes on to ask whether nationalization is inevitable. “Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders.”