The chairman of the Federal Reserve publicly made the case that one of the most unpopular and most scorned programs in Washington - the $700 billion bailout program - needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.
The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts. Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.
Even some of the bailout program's harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system.
Since last September, no major banks have failed and the credit markets have thawed somewhat.
But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.
Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates.
Citigroup is not alone. JPMorgan Chase, Bank of America, Wells Fargo and most other big banks all expect enormous losses as millions of consumers default on their mortgages, credit cards and automobile loans. Other losses are expected on loans made to commercial real estate developers, small businesses and for highly leveraged corporate buyout deals.
During the first three quarters of 2008, banks were able to raise enough capital to offset more than their hundreds of billions in losses by tapping the giant government bailout fund as well as some early private investors.
[214] 15.01.2009 Source: New York Times
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