The Treasury has quietly opened the door to more bailouts of major banks like Citigroup that the department deems too big to fail, exposing taxpayers to potentially large losses on the banks’ souring loan portfolios.

In a little-noticed move on Friday while many people were still on holiday vacations, the Treasury issued regulatory “guidelines” saying it would take the same steps to prevent the failure of other major institutions, as it did with Citigroup in December. At that time, it provided the New York bank with a second large cash investment of $20 billion out of its bank bailout fund, and said it would share losses on $306 billion of the bank’s gigantic portfolio of toxic loans.

The Treasury said it will limit such assistance to “systemically significant financial institutions that face a high risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets.”

It will use “extreme discretion” in selecting which banks to rescue, Treasury said.

Some financial analysts say the department has opened up a can of worms by effectively putting a government guarantee behind “zombie banks” that are essentially insolvent, while putting taxpayers at risk for giant losses on the potentially unsalvageable loans that are at the heart of the banks’ financial problems.

“This program will likely be used to offer similar ‘guarantees’ when Bank of America, Chase, Wells Fargo, Goldman and Morgan Stanley show up hat-in-hand on taxpayers’ doorsteps,” said Rolfe Winkler, a financial analyst with Option Armageddon, a Web site chronicling the mortgage crisis.

“None of our major banks would still be standing in the absence of the herculean bailout efforts by the Federal Reserve and Treasury over the last four months,” Mr. Winkler said. “Committing hundreds of billions - or trillions - of dollars to ‘stabilize’ companies that are already effectively dead will only put huge tax burdens on future generations.”

All of the big banks possess large portfolios of bad loans that they either originated themselves or acquired through government-blessed mergers in the past year and a half. Bank of America had relatively few loan troubles itself before it took on substantial loan problems with the acquisition last year of Countrywide, the nation’s biggest mortgage lender and leading subprime originator, and Merrill Lynch, a leading underwriter of aggressive loans.

Wells Fargo also acquired massive exposure to California mortgages with some of the highest default rates in the nation when it took over Wachovia Corp. in a government-arranged marriage in the fall. And JP Morgan Chase took on the toxic liabilities of Bear Stearns last spring and Washington Mutual last fall in government-sanctioned combinations.

While the mergers greatly expanded the acquiring banks’ shares of the nation’s banking market, they put in jeopardy the banks’ own good credit ratings and stability in a way that makes them vulnerable to the mounting losses on home loans as well as credit cards, commercial real estate and other trouble spots in today’s economy.

Standard & Poor’s Corp. warned this week that banks face a tough slog this year and are still vulnerable to global financial shocks, despite the generous lifelines that the Treasury and Fed have thrown to them. On top of the huge toxic mortgage loan portfolios the banks are holding, S&P; warned, problems will mount with loans made to real estate developers, retailers, car buyers and consumers who are heavy users of credit cards.

S&P; has downgraded the credit ratings of all the major banks to reflect its increased bad-loan exposure, and warns of potentially more downgrades. Still, the largest banks have an advantage over small and regional banks that the Treasury doesn’t deem too big to fail, S&P; said, because they won’t benefit as much from the Treasury’s “safety net” programs providing capital injections and debt guarantees.

CreditSights analyst David Hendler also sees an advantage for the biggest banks because of the extra measure of protection they are getting from Treasury. That is a major reason he is recommending that investors buy big-bank stocks and bonds.

“Even the most cynical investors” can see that the government will fight any attempts to stage a run on a major bank like short-sellers did last fall in episodes that led to the failure of Lehman Brothers, Wachovia and other banks, he said.

“The systemic scares and funding difficulties of the fall of 2008 have made it a priority for the government to resuscitate the systemic players who need the most help,” he said.

Among the major banks, Mr. Hendler is optimistic that most will be able to survive without additional government assistance, with the possible exception of Wells Fargo.

“We worry that the high foreclosures in Wachovia’s option [adjustable rate mortgage] portfolio combined with Wells’ natural California and West Coast focus in residential mortgages could stagger the giant,” he said.

JP Morgan, on the other hand, remains so robust even after absorbing Bear Stearns’ and Washington Mutual’s bad loans, it may be in a strong enough position this year to buy yet another weaker player like Morgan Stanley, he said.

The two remaining stand-alone investment banks - Morgan Stanley and Goldman Sachs - are still viable for now, but could weaken if their traditional sources of funding in moribund markets like asset-backed commercial paper do not stage a revival this year, he said.

Richard Berner, economist at Morgan Stanley, defended the Treasury’s decision to guarantee the survival of major banks while leaving the fate of smaller institutions to fitful financial markets.

“Like it or not, politicians and regulators must decide which institutions are worth saving and which are not, and how losses will be shared among lenders, borrowers, shareholders and taxpayers,” Mr. Berner said.

But he said the Treasury’s guidelines for rescuing major banks do not go far enough and suggested the President-elect Barack Obama’s administration may want to go further in helping the banks get rid of their worst-performing loans.

“Balance sheet repair is necessary to attract private capital and end the credit crunch,” he said.

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