With the news of Citigroup getting guarantees worth US$300 billion in addition to a direct bailout from the TARP funds, there goes hopes that the financial crisis is coming to an end. Remember that not so long ago, before its share price got heavily hit by the mess, CItigroup was the biggest bank in the world by stock market capitalization. As Crooked Timber noted, not only is Citigroup the very definition of “too big to fail”, it’s so big that not even the mighty U.S. government could save it if it goes down.

Here’s a couple of links to some of the best articles on the crisis that I’ve read. A short history of modern finance from The Economist explains the two demonized financial instruments at the heart of the crisis, Collaterize Debt Obligations and Credit Default Swaps from a historical perspective. The article not only explains how they work, but also when and why they were invented and what purposes they serve in finance.

The End of Wall Street’s Boom published by Portfolio and written by Michael Lewis who gained famed for his 1989 tell-all book Liars’ Poker about the bond market. This article covers the boom and bust of the subprime mortgage market from the perspective of various industry insiders.

Here’s the short version of what I would like to see happen: no bailouts and mark everything to market. The U.S. government should use its money to directly assist employees losing their jobs, but should not try to keep insolvent businesses up and running. Yes, it will be a bloodbath. Prices of all assets will fall much, much more than they have so far. But by forcing everyone to reveal all the skeletons in their respective closets at the same time, at the end of the day, we’ll know which business is really sound and which isn’t, and we’ll have a known baseline from which to rebuild the financial system again.

As it is, the current policy is really a sort of managed decline that’s aimed at delaying the day of reckoning and preventing the real extent of what the financial institutions have lost from coming into the light of day. Governments, try as they might, will never be able to jumpstart the economy. Plenty of private investors still have cash on hand. But they will never start investing so long as the government is intervening massively in the markets and distorting competition. What investors want above all is clear information and predictability. Having all the financial institutions reveal their cards provides that information and having the government refrain from second-guessing the market provides that predictability.

Here’s another benefit to having these banks go bust instead of getting bailed out: companies that go into bankruptcy are freed from their contractual obligations. This means that the administrators of the surviving assets are given a freer hand to ignore all of the ridiculous bonuses and entitlements that Wall Street elites have been used to. The current jury-rigging of getting bailouts in return for making new deals on executive pay is messy and legally dubious. I predict that companies will be dogged for years by lawsuits from employees alleging breach of contract.