He has said the magnitude of the crisis faced by the Treasury was unprecedented inasmuch as it involved, in the first instance, credit to troubled giants, Freddie Mac, Fannie Mae, besides Bear Stearns, Washington Mutual, American International Group.

Each of these failures would have been tremendously consequential in its own right. Mr Paulson pointed out that the Treasury faced them in succession, as the financial system seized up and severely damaged the economy.

The US Government was facing a system-wide crisis. The Treasury determined by October that the crisis was more severe than any faced so far.

The initial intent was to stabilise the financial system and to get credit flowing by purchasing illiquid mortgages and mortgage-related securities. But, according to the Treasury Secretary, the severity and magnitude of the situation had worsened to such an extent that an asset purchase programme alone could not be effective enough.

Therefore, with the flexibility provided in the legislation, they deployed a $250 billion capital injection programme, fully anticipating they should follow it with a programme for “buying troubled assets”.

Mr Paulson has admitted that there is no play book for responding to the turmoil they, US policy-makers, have never faced. He says, “We adjusted our strategy to reflect the facts of the severe market crisis, always keeping focus on the goal: to stabilise the financial system that is integral to the day-to-day life of all Americans.”

By mid-October, he claims, their actions had helped to accomplish the first priority, that is , to stabilise the financial system.

As they assessed how best to use the balance money for the troubled assets’ package, Mr Paulson says, they carefully considered the uncertainty around the deteriorating economic situation in the US. The latest economic data underscored the challenges they faced.

Unemployment has risen subsequent to the passing of the legislation, home prices have fallen by 18 per cent over the previous year and auto sales have plummeted. In this background, he felt that it was necessary to use the funds in such a way as to cause the maximum effect.

The innovativeness with which the Treasury Secretary has modified the original troubled assets issue package has, however, had different implications on various institutions.

Some institutions, which were listed to receive help with troubled assets recovery package to relieve them of their toxic assets, fell by the way side.

It is in this context, perhaps, that the Citigroup failed to recover its position, which it would have done, if the Treasury had proceeded as originally intended by the TARP (Troubled Asset Relief Programme).

But now, the US Government has come forward with a really innovative package for reviving the Citigroup. The Government’s $200 billion plus rescue package is a mix of capital infusion, guarantee of liability and purchase of toxic assets.

That an iconic institution, like Citigroup, has to be bailed out reflects badly on the US system of supervision and regulation besides the bank’s own relatively poor risk management system. In any event, one hopes that the bailout package for Citibank succeeds and the bank regains its standing in the global financial scenario.

The bailout for Citibank brings to my mind memories of another day, when the institution was sitting at the top of the US financial system and the rest of the world in 1990-91.

When we were facing the Balance of Payment crisis, former Managing Director of IMF de La Rossiere, who had become Governor of the Bank of France, suggested to me at a meeting of the Bank of International Settlements, in Basel, that I should prevail upon an influential Vice-President of Citibank, Bill Rhodes, to convene a meeting with our creditors to enable rollover and settlement of our pending dues.

These, it may be recalled, essentially consisted of overnight liabilities of State Bank of India in the New York Bankers’ acceptance market. Bill Rhodes had stated to me that he was ready to undertake the obligation. He recalled that he had done a similar exercise for a number of Latin American nations.

It was coincidental that I was advised by a senior friend in the World Bank management, Mr Ernest Stern, that Bill Rhodes’ intervention in settling our problem might turn out to be a kiss of death, because of the perception that he was associated with bailing out defaulting nations and his intervention in India’s case could signal that Indian default was inevitable.

Mr Ernest Stern advised that it was better to go by the IMF staff’s advice to pledge the gold in the RBI’s vaults and redeem our liabilities. We went ahead with the pledge of gold, which incidentally helped to make the nation acutely aware of the balance of payment crisis.

I remember that subsequently, Bill Rhodes had organised a meeting with John Reed, the then Chairman of Citibank, with Dr Manmohan Singh, who was the Finance Minister at that time.

The meeting was held at Bangkok. What John Reed mentioned was not about the Indian BoP crisis, but to request for some fresh branch licences for Citibank in India. Such was their keenness to expand here.

The Citigroup has since developed its business along various new lines, including non-banking finance. It’s a pity that such a prestigious institution should have fallen on bad times due to management and regulation failures and called for a bailout package from the US Government.

What is interesting now is not the rescue of Citibank, but the Main Street itself is calling for a bailout on the same scale. The auto majors of Detroit are pleading for such help from President-elect Obama. Their sales are declining due to falling income. Mr Obama may well consider a bailout for the auto majors.

Not for them the facile advice given by our Finance Minister to the Indian corporate sector to reduce prices. In order to increase demand, the auto majors of Detroit have every trick in their books, including price reduction.

The US Administration will, I am sure, follow its innovative track record and come out with an impressive bailout package for the auto industry, which is vital for the manufacturing base of the country.

I hope the Citibank bailout package sets our policy makers thinking as to what they should be doing in a similar situation. Will the policymakers take a leaf out of the emerging Washington consensus on innovative bailouts?

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