Deal Or No Deal

As expected, the Sunday Night Deal to save Citigroup is a go.

Citigroup Inc is looking at putting risky assets in a "bad bank" -- a step to reassure investors that the rest of its assets were safe, the Wall Street Journal reported on Sunday.

The "bad bank" might take on some of Citigroup's more than $1.23 trillion of off-balance sheet assets. Citigroup might bear the initial losses on the assets, and the government might cover losses beyond a particular threshold, the newspaper reported, citing people familiar with the matter.

U.S. financial markets are waiting for some sort of Citigroup announcement this weekend, and if nothing happens, the bank's stock is likely to plunge further on Monday, analysts said.

Let me emphasize that one more time so that it sinks in: Citigroup has more than $1.23 trillion of off-balance sheet assets. One and a quarter trillion (with a T!) in toxic derivatives as "assets" means this bank is effectively insolvent. It means our entire economy is effectively insolvent, because the second Citigroup goes under, those "assets" which are nothing more than fancy IOUs get called into question.

Citigroup is just one bank. It holds well over one trillion in IOUs. The IOUs are accepted as having worth because of the confidence that those IOUs will be paid, and every bank it sitting on a pile of them.

Globally those IOUs, these derivatives, are valued at over a quadrillion dollars...a thousand trillion. One million billion dollars.

If Citigroup goes under, then it will take this entire system down with it. More banks will fail. Their chunk of the derivative nightmare will fail too. If those IOUs are being defaulted on, then they become worthless. Only the agreed upon value of these derivatives gives them value. If the confidence that these IOUs have value evaporates, then the actual value of the derivatives evaporates as well.

One quadrillion dollars of theoretical global money vanishing.

Poof. And our global financial system poofs along with it. Yes, this is some scary stuff.

Citigroup is now on the clock. The stock will drop low enough to force another bailout worth tens of billions if not more. If Citigroup fails, it will take the global system with it.

Deal or No Deal. No Deal here means the end of the game.

And so more billions will be thrown to the banks. And the underlying rot at the foundation, the toxic weight of tens upon hundreds of trillions in derivatives, will continue to crush the financial sector. More banks will fail. More will be spent to save them.

Eventually, another Lehman Brothers will happen. Obama can't stop it. His hands are tied. There's nothing he can do, and his choice of Tim Geithner as Treasury Secretary strongly suggests he has chosen to continue the path of bailouts and more bailouts.

But Obama will have to end the bailouts eventually. He will be forced to do so when China and Saudi Arabia can no longer afford to front us the cash.

When that happens, all bets are off.

[UPDATE] The US government and Citigroup are frantically trying to seal the deal before the markets open tomorrow.

The U.S. government and Citigroup are working feverishly to hammer out a rescue plan for the beleaguered bank. If all goes according to plan, there will likely be an announcement of some type of plan in a couple of hours.

The exact nature of plan remains unclear, but the government is leaning towards some sort of cash infusion into Citigroup. The plan will probably be a multi-layered one, which means the government could backstop losses on Citigroup's troubled assets as well. In exchange, Citi may issue preferred stock to the government

Sources with knowledge of the negotiations say "everything is on the table", meaning that even the government plan of buying the troubled assets could be revived.

The problem with buying the assets from Citi is political: People close to the deal know that other firms will line up and ask the government to purchase their troubled assets as well. Brokerage stocks got crushed when Treasury Secretary Hank Paulson reversed his plan on the TARP to direct capital infusions to the banks and away from buying troubled assets.

The Bottom line: This is very fluid and the situation may change again. But as of now, the government is getting cold feet on plan to buy troubled assets, which leaves direct capital infusion on the table.

They have no choice.

They will have no choice when the next major bank goes under.

And the next.

And the next.

[UPDATE 2] The Citigroup deal is expected to be a direct cash infusion of $10-$20 billion for starters, CNBC reports.

A Taxing Problem

Turns out Obama has no intention of rolling back the Bush tax cuts just yet.

President-elect Barack Obama may delay the rollback of high-income tax cuts for the wealthiest Americans, two of his aides said Sunday.

The tax cuts were instated by President Bush and discontinuing them was a key promise of Obama's campaign for the presidency.

Obama's political strategist David Axelrod was asked by Fox News's Chris Wallace if the measure could be allowed to expire on schedule after 2010 and avoid an immediate repeal.

"Those considerations will be made," said Axelrod, who has been selected as Obama's senior White House adviser.

Bill Daley, an adviser to Obama and commerce secretary under former President Bill Clinton, said on NBC's "Meet the Press" that the 2010 scenario "looks more likely than not," Reuters reported.

The change in policy may suggest that Obama is wary of imposing more taxes during a financial crisis or that he is looking to boost Republican support for his recovery measures.

Or that the people running his financial program have no more idea how to fix the problem than the current occupants.

Obama has no need for the Left now. He's running for 2012 as a moderate Republican before he's even sworn in as a Democrat.

The Reality Of Obama's Foreign Policy

I've said on a number of occasions that my biggest problem with Obama is foreign policy. He never saw the US war on Iraq as wrong on moral reasons, but on strategic ones. No person allowed to win the Presidency and the role of Commander-in-Chief would ever tell America that using military force is morally wrong.

Obama sees Bush policy for the most part as incompetent and poorly executed, not wrong. Obama plans to do everything that Bush couldn't do: catch Bin Laden, draw down the "wrong" war in Iraq, and concentrate on the "right" war in Afghanistan and Pakistan. Same quagmire, different location.

Which brings us to the grim realization that -- surprise! Obama's a Clintonian interventionist centrist.

Mr Obama has moved quickly in the last 48 hours to get his cabinet team in place, unveiling a raft of heavyweight appointments, in addition to Hillary Clinton as his Secretary of State.

But his preference for General James Jones, a former Nato commander who backed John McCain, as his National Security Adviser and Arizona Governor Janet Napolitano, a supporter of the war, to run the Homeland Security department has dismayed many of his earliest supporters.

The likelihood that Mr Obama will retain George W Bush's Defence Secretary, Robert Gates, has reinforced the notion that he will not aggressively pursue the radical withdrawal of all combat troops from Iraq over the next 16 months and engagement with rogue states that he has pledged.

Chris Bowers of the influential OpenLeft.com blog complained: "That is, over all, a centre-right foreign policy team. I feel incredibly frustrated. Progressives are being entirely left out of Obama's major appointments so far."

Markos Moulitsas, founder of the Daily Kos site, the in-house talking shop for the anti-war Left, warned that Democrats risk sounding "tone deaf" to the views of "the American electorate that voted in overwhelming numbers for change from the discredited Bush policies."

A spokesman for the President-elect was forced to confirm that Mr Obama holds to his previous views. "His position on Iraq has not changed and will not change."

But the growing disillusionment underlines the fine line Mr Obama must walk between appearing to reach out to former opponents and keeping his grassroot supporters happy.

Mr Obama seems conscious of the need to move fast, to reassure a watching world that he will be ready to hit the ground running on foreign and economic policy.

He will wait until Friday before formally announcing his national security team, but he will on Monday formally unveil his economic team, with New York Federal Reserve bank chairman Timothy Geithner as Treasury Secretary and the New Mexico Governor, Bill Richardson, in the Commerce portfolio.

There's a pretty large difference between "better than McCain" and "change we can believe in." Hillary, the word has it, is already cleaning house of the folks who actually thought Obama was going to keep his word to progressives on the war.

Before Hillary Clinton has been formally offered the job as Secretary of State, a purge of Barack Obama's top foreign policy team has begun.

The advisers who helped trash the former First Lady's foreign policy credentials on the campaign trail are being brutally shunted aside, as the price of her accepting the job of being the public face of America to the world. In negotiations with Mr Obama this week before agreeing to take the job, she demanded and received assurances that she alone should appoint staff to the State Department. She also got assurances that she will have direct access to the President and will not have to go through his foreign policy advisers on the National Security Council, which is where many of her critics in the Obama team are expected to end up.

The first victims of Mrs Clinton's anticipated appointment will be those who defended Mr Obama's flanks on the campaign trail. By mocking Mrs Clinton's claims to have landed under sniper fire in Bosnia or pouring scorn on her much-ballyhooed claim to have visited 80 countries as First Lady they successfully deflected the damaging charge that he is a lightweight on international issues.

Foremost among the victims of the purges is her old Yale Law School buddy Greg Craig, a man who more than anyone led the rescue of his presidency starting the very night Kenneth Starr's lurid report into the squalid details of the former president's sex scandal with Monica Lewinsky were published on the internet in 1998. Despite his long and loyal friendship with the Clintons, Mr Craig threw his lot in with Mr Obama at an early stage in the presidential election campaign. As if that betrayal to the cause of the Clinton restoration was not enough, Mr Craig did more to undermine Mrs Clinton's claims to be a foreign policy expert than anyone else in the some of the ugliest exchanges of the battle for the Democratic nomination.

Underneath the catty sniping is the truth: Obama's foreign policy won't differ from Bush or Clinton. Hillary must have realized that her best shot at the White House isn't around Obama...but through him.

The wars will rage on until economic circumstances force something else.