Citigroup is one of the world's best-known banking brands, with more than 200 million customer accounts in 106 countries. Its plunging stock price threatened to spook customers and imperil the bank.
– The Wall Street Journal

Here’s a sign of the times for you...

As I sat having lunch in a local café over the weekend, the waitress (a cute girl in her 20s) asked what book I was reading. I told her it was a history of monetary policy in the 20th century, fully expecting a blank stare in reply. (Or maybe a quick “oh, that’s interesting” and immediate loss of interest.)

She actually wanted to talk about it!

Your humble editor thinks it’s great that people are taking interest in this stuff – inflation, deflation, monetary policy and so on – even if the system has to come apart at the seams for them to do so.

The curiosity makes sense, given the backdrop of the times. Most of the time, normal people see no connection between the “macro” element and what’s going on in their daily lives. Now they see it.

My first jolt of macro interest had a personal connection too (back in the mid-90s). I was drawn to the power of top-down thinking upon realizing how traders had made fortunes from it. Like George Soros’ billion dollar score in the British Pound in 1992... or Gary Bielfeldt parlaying $600 into well over a hundred million... or Paul Tudor Jones tripling his wealth in the crash of ’87 (and again in the 1990 Nikkei bust).

To hunt truly big game, you need a big gun... and you need to know when to shoot it. Macro can help on both counts.

Citi Gets Rescued

Moving on: Another Sunday night, another huge piece of news. This news cycle is utterly unhinged. It feels like 2008 has seen enough late-breaking Sunday night stories of the “holy moley” variety to last a decade.

The latest example, of course, being the bombshell news of a government rescue for Citigroup.

As of Friday’s close, Citi’s stock had lost more than 90% of its value from the 2007 peak. There was genuine fear that, with a share price below $5, hordes of institutional sellers would come out of the woodwork due to their “no shares below $5” portfolio rule. This could have led to full-on meltdown for Citi. (Shares are trading back above $5 on Monday as I write.)

The rescue agreement is a “new phase,” saith the WSJ, in which federal officials “now appear willing to help shoulder bad assets, on a targeted basis, from specific institutions.”

A “new phase” indeed. After spending some $300 billion on rescues and injections over a matter of weeks and months, our government has doubled (or perhaps tripled) its commitments in one fell swoop. The Fed and Treasury have turned “doubling down” into a higher art form. (Blackjack anyone?)

Thus far, the pertinent details of the rescue are as follows:

• The toxic sludge still on Citi’s balance sheet will be sliced up and doled out to various branches of the US government.

• Official estimates put the size of Citi’s toxic sludge pool at $306 billion.

• Citigroup is on the hook for the first $29 billion in losses from the $306 billion.

• The Treasury, Fed and FDIC are on the hook for the rest.

• Citi is also slated for another $20 billion dollar “capital infusion” (on top of the $25B already received).

Half a Trillion On Tap

The details could still change quickly, of course. The situation is “fluid” to say the least. But for now this looks like a half-trillion-dollar bailout... five-hundred billion in commitments at least, just for Citigroup.

Why do I say half a trillion when official estimates put toxic assets at just over $300 billion? Because, not to put too fine a point on it, the jokers running this dog and pony show can’t be trusted.

It would take all ten fingers (and maybe a few toes) to count the number of times Fed and Treasury officials have declared the ongoing crisis “contained.” Nor have they proven adept at pricing things. These numbskulls lowballed the danger of subprime, they lowballed TARP, they lowballed the projected costs of the Iraq War, and chances are they’re lowballing this too.

On top of that, Citigroup’s books are so massively convoluted and complex that no one truly understands what’s in there – least of all the megabank’s own staff. The place is too sprawling and unwieldy to be managed.

That’s why Oppenheimer analyst Meredith Whitney suggests even Stephen Hawking doesn’t have the brains to save Citi. It’s also why I suspect the official $306 billion figure is what’s known in less-than-polite circles as a SWAG, or “silly wild-ass guess.”

Given these facts, it seems only prudent to estimate half a trillion as a conservative starting bid for Uncle Sam’s liability on this deal... and it could well be worse.

Do I Hear a Trillion?

Heck, maybe it is worse. Maybe the real rescue number for Citi is a cool Trillion, with a capital T. Can anyone really say they know or don’t know?

One mind-boggling thing we do know, thanks to the WSJ, is that “in addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren't reflected there” (emphasis mine).

That doesn’t sound so good. No wonder the powers that be are trying to play things down: If the rescue number really is close to a trillion, can you imagine them letting that cat out of the bag?

How would it sound to admit that just one bank – one group of overpaid jokers – will be hoovering up more taxpayer dollars than the sum total of the Obama administration’s proposed consumer stimulus and alternative energy programs combined?

And by the way... how in the wide-wide-world-of-sports did we get to this bizarre juncture in the first place?

That is to say, how did we get to the point where any private institution of any kind was allowed to simply stash $1.23 trillion worth of “entities” – close to 10% of US annual output! – in some vast and murky cubby hole perplexingly “not reflected” on the balance sheet?

To quote Albert Einstein: “Only two things are infinite, the universe and human stupidity... and I’m not sure about the former.”

Sources of Cheer

For the moment, investors are cheering the Citi rescue news. (Given the churned-up state of things, I’m hesitant to speak more firmly prior to Monday’s closing bell.)

The burst of cheer seems drawn from a few different areas.

For one, Wall Street is relieved at the thought of seeing the Treasury Secretary leave. (Last Friday, I opened my weekly note to Safe Haven Investor readers saying “Hank Paulson is an idiot and should be fired immediately.”)

Investors are tired of the ham-fisted fools in Washington. They are ready for a new crop, and Obama’s swift assemblage of an all-star economic team has given hope in that regard. The new guys may not have any silver bullets, but they’ll at least start with a clean slate (and a keen sense of what not to do).

As I told Safe Haven readers, “It’s a small bit of luck that Paulson and his crew will be gone soon. Hopefully they won’t erode investors’ faith in markets any further in the window of time they have left. Considering the hole Paulson has already dug, that would take digging down to bedrock... and then breaking out the pneumatic drills.”

There is also hope out there that Citi will prove to be THE BIG ONE – the “bailout of bailouts” that finally nips this never-ending credit crisis nightmare in the bud.

Much like the National Debt Clock that ran out of zeroes last month, patience with the credit crisis has maxed out too. Our forbearance has worn to the point where any fix seems worth trying, any price seems worth paying, just to make the damn thing end.

And so, the thinking goes, maybe slamming a couple hundred billion – and really, who’s keeping score at this point? – into the maw of one of the biggest, oldest, most badly bungled banks in existence will finally do the trick.

Got Gold?

Investors are doing something else too. They are buying gold and gold stocks in a big way again. The yellow metal has jumped like a scalded cat in the past two trading sessions, shooting back above $800 per ounce.

This is no doubt for many of the reasons cited in last week's Taipan Daily, "Run, Rabbit, Run! The Importance of Monetary Velocity". When one harbors general concerns over the solvency of one’s government, twelve zeroes’ worth of open-ended liability taken on over a weekend tends to concentrate the mind.

As you can see from the chart action in the Gold Miners’ ETF (GDX:NYSE), good things are afoot in this once-gloomy corner of the market.

Gold coins have been flying off the shelves. Without an inside connection, they have become all but impossible to buy on any kind of short notice. This is a leading indicator for how the world feels about gold – the only proxy for cash not subject to a printing press.

Up til now, various forms of “paper” gold – futures, ETFs, gold stocks and the like – have been pushed under water by a deluge of forced selling and hedge fund unwinding (as we have tirelessly pointed out).

Perhaps with this “bailout of all bailouts” underway, the golden dam is finally bursting too.

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Other Related Topics: Bank Bailout , Gold , Justice Litle