Good crisis management matters

It matters whether the Treasury gets things right. This may be obvious but we become very aware of the implications when there is a strong market reaction. First, the plan to help Citicorp is a good one. The combination of guarantees without placing the Treasury in a first loss positions creates the right incentives and message to the market. It also shows good cooperation with the FDIC and Fed.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

Second, the U.S. Treasury Department today announced an extension of Treasury's temporary guarantee program for money market funds until April 30, 2009 to support ongoing stability in this market. This will provide a little extra relieve for the money funds and will allow markets to further calm and relieve some of the pressure on the Fed.

Third, there is talk that Treasury will actually try and use the second $350 billion in TARP as soon as possible. This is in contrast to comments made last week that stated Treasury would wait on releasing the money until the new Administration.

The reaction was swift to these events with a big stock rally, but the dollar got hit hard across all currencies. All of this crisis management is going to cost money and the US deficit will now look to be over $1 trillion.