Gurantee the Liabilities

Here's my Monday evening quarterbacking. They should have guaranteed Citigroup's liabilities (in other words, extending deposit protection to other types of creditors and to large depositors) rather than its assets. (Perhaps nobody had the authority, but Congress should give them that authority now in case the same thing happens again.) The liabilities are effectively guaranteed anyhow, because officials know better than to let Citi ever actually default. But as long as the liabilities are not explicitly guaranteed, the company essentially has the financial system as a hostage. They won't threaten to kill the hostage intentionally, but when they bargain with the government, they can threaten to take the risk (i.e. to refuse a bailout on the government's terms, thus putting the hostage in peril). This gives them a bargaining chip. If their liabilities were explicitly guaranteed, they would lose that bargaining chip, because the government guarantees would insulate the rest of the financial system. Then the government could bargain thusly: "Accept our bailout that wipes out 98% of your equity, or else we'll force you to write down your assets and recognize your off-balance-sheet liabilities until you have no equity left, and then we'll take over, and believe me, that won't be pleasant for the current management."