We're in uncharted waters, folks, and there is no guarantee that all the financial backstopping and investing the government is doing, on behalf of taxpayers, will work. This is an unsettling position, to say the least.

With the most recent Citi intervention, a new model for bank bailouts seems to have emerged, Bloomberg notes. The plan calls for explicitly insuring against losses on troubled assets with taxpayer funds, while continuing to inject capital. Taxpayers are now on the hook for 90 percent of the losses on $306 billion in real-estate loans and securities, beyond the initial $29 billion. The chances of big losses seem pretty high, unfortunately; it wouldn't surprise anyone if losses on the portfolio ran much higher than $29 billion (which is less than 10 percent of the $306 billion).

Understandably, some will feel boondoggled on this aspect of the deal. After all, the government rightfully, if a bit embarrassingly, gave up on its early idea to directly invest in securities. Most applauded that decision, as the valuation issues were just too tricky. But with the new Citi plan, one could argue that the government has gone back to its initial idea, but made it even worse. The government is now effectively shouldering the risk of toxic assets without any of the upside potential. Citi is entitled to all that.

To some degree, you have to wonder if Citi is now incented to take massive losses at public expense, to clear the decks.

For taxpayers, this risk shouldering is being paid for with $7 billion in preferred shares and the warrants to buy $2.7 worth of common at a strike of $10.61. In some ways, Uncle Sam seems to be going all in--nearly, anyway. Recall the government will also invest an additional $20 billion worth of preferred shares. That brings the total investment to $45 billion in the bank. The last $20 billion purchase of preferred shares carry interest of 8 percent, which seems high. Here's some interesting analysis.

But really the only way taxpayers will win is if Citi somehow rights itself and the stock rises, allowing Uncle Sam to exit its preferred shares and perhaps even makes some money on its warrants. It's unclear how long that will take. It's also unclear if similar deals will be struck with other banks. More than 171 are now considered problem banks. The government could be upping its bets soon.

The biggest issue here is the moral hazard embodied by such bailouts. We just keep bailing banks out, and we have no choice, of course. But it just seems wrong. It would be nice if there were some accountability imposed for this mess. Any ideas? - Jim