December 14, 2007 (LPAC) -- Citigroup's announcement late yesterday that it would take the remaining $49 billion of assets in its seven structured investment vehicles (SIVs) is yet another sign that the collapse of the banking system is outpacing the bailout efforts.

Citigroup had hoped to buy time by parking the worthless (or "illiquid," to use the current euphemism) paper into the new super SIV being pushed by Treasury Secretary Henry Paulson, but that plan has never gotten off the ground. Citigroup joins Britain's HSBC, France's Societe Generale and Germany's WestLB in absorbing SIV assets. The SIVs were essentially toxic waste dumps for assets the banks did not want on their balance sheets, and in taking them back the banks are increasing their losses, in order to head off an even bigger problem.

That problem is the certainty that were the SIVs forced to start selling assets to raise the cash to meet their obligations, the resulting fire sale would publicly reveal that their assets were worth far less than they carry them on their books, resulting in huge write-downs not just for themselves, but for all holders of similar securities. Since these fictitious values are the only things standing between the banks and open bankruptcy, the bankers are determined to protect the fiction at all costs.

Commentators are now saying that Paulson's M-LEC Super SIV plan is now dead, but to the extent that the announcement of the plan helped buy Citigroup the time to work down its SIV exposure--aided by a $7.5 billion cash injection from Abu Dhabi--it may have served an intended purpose. The name of the game here is to buy time, to put off admitting bankruptcy in the hope that things might get better. They won't, and the losses will keep growing.