Citi: Will the Bailout be Enough?

The WSJ has details of how the Citi bailout was structured:

If the U.S. were to take another equity stake, Treasury Secretary Henry Paulson wanted it to be small, since otherwise the government would end up owning Citigroup. The officials worried that appearing to nationalize the company would further roil markets. They agreed that $20 billion was the limit for what they would invest.
The policymakers also discussed whether Mr. Pandit should remain CEO, say people familiar with the talks, and agreed that removing him would send a bad signal to the markets and potentially destabilize the company.

Somehow, they are sure this will be sufficient to cure what ails Citi:

Some officials involved in the rescue are hopeful that they finally got it right by creating a template for future efforts, if needed. They say the decision to guarantee $306 billion in troubled assets -- a first among all the implemented rescues -- will help ward off the short sellers who led the way in driving down Citigroup's stock last week. They say their main goal right now is shoring up confidence in institutions, and that the weekend effort seemed, at least Monday, to have succeeded at that.

Color me unconvinced. If there's one thing we've learned during this crisis, it's that just-enough is never enough.

Now is not the time to worry about optics: how it would look to nationalize Citi, or to squeeze out Pandit. Paulson would have done well to call up Gordon Brown for advice: if you're putting in the kind of money which gives the government a majority stake, then so be it. And the owner naturally has the right to choose the CEO.

What's more, I can't think of anybody whose confidence in Citi has been shored up by the weekend's cash injections, especially since the mechanism -- weird second-loss asset guarantees on a small part of Citi's balance sheet -- is so opaque. If it was short sellers who "led the way in driving down Citigroup's stock last week", I don't for a minute believe that they will have decided that Citi is now untouchably secure. No bank with as little tangible common equity as Citigroup counts as secure -- and its official communications are also helping to reinforce the sense of panic.

I asked Citi about the email I received yesterday morning, but ended up even more confused than before. It says quite explicitly that interest-bearing checking accounts containing more than the $250,000 FDIC maximum will be guaranteed by the Temporary Liquidity Guarantee Program -- but that doesn't seem to be true, since Citi's interest-bearing checking accounts with that much money in them yield more than 0.50%. Unless Citi starts slashing its deposit interest rates sharpish, I'm not sure how they can justify the email's claims.

Update: And that's exactly what Citi is doing! Per an email I just received from them:

In order to continue the unlimited account coverage during the FDIC's Temporary Liquidity Guarantee Program, Citibank has made the decision to reduce all interest rates on interest checking accounts to no more than .50% and will commit to maintain all of the interest checking accounts at a rate no higher than .50% through December 31, 2009. Citibank chose to participate in this program on behalf of its customers to provide the benefit of additional FDIC insurance coverage.