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Fed Investment in Banks Loses $9 Billion in One Month


The question now: Is there an exit strategy?

Uncle Sam's "investment" in the nation's banks is shaping up to be a really terrible move, at least in the short-term.

An analysis by the Associated Press finds the government's purchase of stock in large and small banks has lost about $9 billion, or a third of its value, in just a month.

Shares of virtually all the banks that have received bailout bucks are below the prices negotiated by the government. The Treasury says it's no day trader, and is instead taking the long view.

That view includes the continuing health of the nation's banking system. Major banks haven't collapsed, and the Federal Deposit Insurance Corporation has lined up buyers for those local or regional banks it closed, averting Depression-era runs on financial institutions.

No one would want Uncle Sam as a portfolio manager, but a 1929-style catastrophe appears to have been avoided this time by pumping massive amounts of cash into the system. If so, it's money well spent - regardless of the one-month negative return.

But there may be more trouble ahead. Citigroup (C) has been pounded, JPMorgan (JPM) is beleaguered, and the housing market looks like it's years away from shaking off the shenanigans of Fannie Mae (FNM) and Freddie Mac (FRE).

Federal intervention is risky - but we can hope a few hardy souls at the Treasury Department know what's going on. However, the Treasury's $700 billion rescue package is only part of what could become the taxpayers' future liability.

So far, the FDIC has guaranteed about $1.4 trillion in debt issued by banks. Some estimate that the cost for the government's effort to ease the pain in the credit crunch could go as high as $7 trillion, including guarantees of certain debts.

The danger: Uncle Sam ends up artificially propping up banks in the long-term. In short, Federal guarantees could become a crutch for poor management. Somewhere along the line, someone needs to say that weaker financial institutions need to fail to assure the overall strength of the nation's banking system.

It remains to be seen if Uncle Sam has made the right decisions. An exit strategy would be helpful - but so far, no one in Congress has presented a detailed plan for getting government out of the financial sector.

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