Barry Ritholtz presents an interesting theory in Bailout Nation, which he discussed in more detail recently. Briefly, he suggests the possibility that Paulson forced all the banks to take TARP funds to provide cover for Citigroup, whom he contends was the only bank that needed immediate assistance.
While he's correct that Citigroup was (and remains) the least stable and most insolvent of all the recipients, every bank needed a psychological pop that only fresh and government-cheap capital could provide. The dominoes were falling quickly and the grim perception was that all could be brought down by insolvency fears.
Was Lehman any more insolvent than Morgan Stanley or Goldman, if all firms were forced to consider level 2 & 3 assets? Of course not. You see the reasoning and can imagine the fear it instilled in government officials. I believe Paulson was acting to boost the perception of solvency for the entire group. Months later, with changes to fair-value accounting, the insolvency perception remains paramount in the minds of certain analysts and bloggers, though the green-shoot camp seems happily content with 'whistling by the graveyard.'
And for the record, Citigroup has received $45 billion in TARP funds, a $306 billion taxpayer guarantee of assets, billions in recently-issued, FDIC-backed debt, access to TALF and other Fed programs PLUS at least $5 billion in payouts from AIG. Is there anything I've missed?
Not such good news for the 'soylent green crowd', Ritholtz says a second-half recovery is not in the cards.