2008 will be the year of "too big to fail."
That ubiquitous phrase has captured the attention of Wall Street, Main Street and Washington, but what exactly does it mean?
Clearly, the market is grappling with that question, and therein lies a very big problem for investors. The lack of clarity on this issue has been stunning. As a result, volatility is off the charts and stock values are plummeting.
This week has been bizarre, to say the least. Early in the week, Treasury Secretary Hank Paulson let the markets and everyone else know that the original purpose of the Troubled Asset Recovery Program (TARP) was no longer a workable solution. In place of buying distressed assets, the Treasury is working to solidify the capital structure of the banking system. I won't criticize the government here, but the change of scope given the size and urgency of the original plan is a bit random.
It does not give comfort to the market.
Next we had the auto industry bailout hearings. With hats in hand, the leaders of the Big 3 automakers and their union bobo made an appearance in Washington. The highlight of the hearing had to be the acknowledgment that all arrived via private jet.
Talk about bad PR. It's like showing up to the soup kitchen in a limo. Good grief.
The finale piece of the bizarre week came from Saudi Prince Alwaleed. The wealthy Arab oil baron stated his intention of increasing his stake in Citigroup (NYSE: C) to the 5% mark from his current 4% position.
What was originally seen as a vote of confidence turned into a bit of a disaster, as investors sold shares of C in droves. The stock was down more than 26% Thursday alone.
The collapse in Citigroup and the overall lack of confidence triggered by the above events has returned the market to Armageddon phase. Along with the drop in C, the market closed at new lows Thursday, with many expecting more pain to come.
I have to say I'm as amazed at this action as I was back in the mid 90s when stocks seemed to go up huge amounts every single day. I felt a bit dumb at that time for not participating in the bull market of non-sense.
Today, I feel dumb again. A short, no matter when placed, is winning in this market -- and winning big.
The good news with Citigroup is that the government has drawn a line in the sand and it's on the right side of that line. I wrote as much in mid-October when I suggested that C was one of the chosen to survive.
That has not changed. I also said that the short term still looked hazy for the company. That has borne out during the last month or so. Now, Citigroup is trading under $4 per share and its market capitalization has been obliterated.
Given the government backstop, I would be comfortable nibbling on C at these prices. Again, that is not to say more pain will come in the short run. In the long term, Citigroup will be a leader when the economy recovers.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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