Bank of America and Citi receive $440 billion more in bailouts

2008_10_07t091103_450x299_us_bankofamerica I was listening to the Clark Howard Show the other day and Clark brought up the fact that the federal government has provided a gigantic bailout to Bank of America and Citibank. Bank of America required $20 billion in cash, followed by a $118 billion backstop to deal with the recently acquired Merrill Lynch and some of the bank’s own problems. Citibank, meanwhile, got a $302 billion backstop.

A “backstop” simply means that when loans go bad at these banks, we the taxpayers will absorb the hit for these massive amounts of money. Worse still, there’s concern that these amounts of money won’t come close to covering all losses on the loans.

Barron’s reports that the 4 largest banks in the country account for 1 in every 2 “bad” dollars. That’s a total of $2.4 trillion (or 2,400 billion dollars) in toxic assets.

Clark says that we’re going to need every penny on deck to rescue the banking system because capitalism can’t function without capital. The Swedes had a similar mess back in the ’90s and solved it by nationalizing all their banks, cleaning them up and selling them back to the public.

Another alternative is to set up a “bad bank.” When the savings and loan industry imploded in the late ’80s, our government set up a “bad bank” called the Resolution Trust Corporation (RTC) to take over the assets, generate whatever money it could and then close up shop.

But there’s an important distinction between the RTC solution of the past and what the banks are clamoring for today. The RTC took assets off the hands of failed institutions. But now the banks want to preserve their stockholders and stick taxpayers with the bill. That would be the ultimate in crony capitalism and corruption if it comes to pass, according to Clark.

Ultimately, in order to get the banking sector functioning again, the pain has to first be born by the stockholders — and that includes Clark. As a stockholder in banks, he knows that his holdings should be wiped out too.

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