TARP Flip-Flop Rekindles Bair Market in Financials

Hank Paulson's flip-flop on the TARP last week has proven to be perhaps his biggest gaffe yet as Treasury Secretary; this one has caused major dislocations, thanks in part to plunging values for mortgage backed securities. Traders had expected to flip much of the toxic trash into the TARP. But that was a week ago, a virtual eternity in life under Paulson, and now they are stuck.

This debacle has probably wiped out more capital than Hank's previous moves, and chances are even recently departed Citi exec Sallie Krawcheck is ashen faced over the turn of events, given Thursday's plunge was the worst one day implosion in Citi's history:

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, according to people familiar with the matter....Citigroup's board of directors is scheduled to have a formal meeting Friday to discuss the options, according to people familiar with the situation. Directors also have been talking by phone about what could be done to reverse the stock's slide.

Top executives were locked in meetings Thursday to hash out a stabilization strategy. Chief Executive Vikram Pandit scheduled a conference call for 8 a.m. Friday to discuss the situation with senior managers. WSJ

Paulson's bombshell has left a crater in the financial sector, evidenced by the devastation in the Financial Select Sector SPDR (XLF-AMEX) over the past week.