C

Citi, which has been one of the worst investments I have made (though some options turned out alright, I started buying into the underlying when it was worth 7 times yesterday's close), is setting a new course for govt. bailouts.

Now the govt. will be partners on billions of dollars in debt, a very different setup to the previous loans against troubled assets.

Here is how the deal works:

"Under the terms of the agreement, Citigroup will cover the first $29 billion of pretax losses from the $306 billion asset pool, in addition to reserves it already set aside.

Citigroup will accept 10 percent of losses above that amount, with the government responsible for 90 percent. The Treasury is second in line, taking $5 billion in losses, and the Federal Deposit Insurance Corp. is third, absorbing up to $10 billion. If the portfolio plummets through those triggers, the Fed steps in with a loan for the remaining assets"

This is mostly because of the SPVs (special purpose vehicles) which are off-balance-sheet entities set up by the i-banks to invest in crap like mortgage derivatives, and to give leverage to hedge funds. It was one of the reasons my old job of calculating hedge fund leverage and other such things was so difficult, because no one had any idea how big the SPVs were. And now we know that they nearly killed Citi.

Well... I have to say, this downturn has outlasted my expectations by a very wide margin.

Often I wonder where the line is between self-fulfilling-prophecy and rational action.