Rescue plan leaves troubled mortgage-backed securities on bank's balance sheet.
The US government's titanic battle against the credit crisis keeps escalating – and a key reason is that despite bailout efforts, the risk of "toxic" assets lingers on.
The bailout of Citigroup last week is the latest example, but the challenge goes beyond a single giant bank.
Just a few weeks ago, Citi was among the big financial firms that received an infusion of capital from the US Treasury. The injection was designed to help them weather the current storm of sour mortgage loans, falling real estate values, and a weakening economy.
The Treasury's recapitalization program had an impact. Borrowing-cost indicators of stress retreated somewhat from panic levels seen in October.
But the new capital reserves didn't wipe away the problem that's been weighing on financial firms for 16 months: large and murky risks remaining on their books.
The best way to alleviate the credit crisis, many financial experts say, is for the positive boost of recapitalization to be matched by effective measures to address the negative drag of troubled assets.
But how to do that is a difficult question, and one that affects both the duration of the crisis and its ultimate toll on taxpayers and the economy. The Citigroup bailout offers one possible path, but not the only one.
"The American taxpayer has bought a lot of exposure to Citigroup's bad assets," says Pete Kyle, a finance professor at the University of Maryland. "As near as I can tell, Citigroup failed but the government wanted to pretend like it didn't fail."
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