It appears that the conduit consortium is simply an extra layer of securitization. It reminds me of the way the lender of last resort function was implemented, sort of, with several noticeable failures, in the era preceding the creation of the Fed. It has the potential to further concentrate risk, like an Army Corps flood control project that can withstand a category 3 but not 4 storm—if there are any buyers.
From an equity standpoint, I think James Hamilton has it right:
In my opinion, part of what created the current problem was the perception that participants were too big and too many to fail. If the government won’t let Citigroup fail, could it allow a superconduit to go down?
I am skeptical of any claims for a feel-good, this-will-solve-all-the-problems fix. The reality is that someone must absorb a huge capital loss. The question we should be asking from the point of view of public policy is, Who should that someone be?
My answer is: the shareholders of Citigroup.