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Citi Rescue Could Lead to More Trouble

Rivals may take risks, expecting taxpayer protection

By Matt Cantor, Newser Staff

Posted Nov 25, 2008 7:23 AM CST

(Newser) – The Citigroup rescue bolstered confidence in the financial sector in the short term, but in the long term it could spell more trouble for taxpayers and other struggling banks, writes Eric Dash in the New York Times. Other banks will see the bailout as a template for future ones—giving them a backstop for risky plays and even a way to gain a competitive advantage. It's only a matter of time before they begin lining up, Dash writes.

Citigroup may now be able to borrow at lower interest rates than its rivals, he writes. “Citi has a decided advantage over them because of the loss-sharing agreement,” says a former bank CEO. And the government’s willingness to give “special treatment” to giant banks could hurt deposits in smaller ones. Eventually, tax dollars may have to back all banks in a “third iteration of the government’s financial rescue.”

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The Citi bailout helped in the short term, but may pose long-term problems. (AP Photo/Paul Sakuma)

Flags wave in the wind at the Citigroup Center in New York Monday, Nov. 24, 2008. (AP Photo/Craig Ruttle)

Other banks may expect government backing. (AP Photo/Mark Lennihan)

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It's got to be frustrating for small banks. They don't get special treatment. If you are a big bank, you get special treatment. That is why everyone wants to be so big. - David Ellison, a mutual fund manager who specializes in financial companies

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Citi Rescue Could Lead to More Trouble