Bring on Heisenberg - we spotted this thing in level 3, but we can't tell how fast it is moving. (But it sure looks from the probability distribution like it's heading down.)
So even a 10% haircut on these assets (conservative these days...) means another >$10bil writedown from Citi. Combined with their initial poorly capitalized position, and the question becomes: how long can they survive?
The death watch begins (all bets are off if Uncle Ben comes to the rescue though).
If you can price it with certainty, you can't know what is in it or where it is, but if you know precisely what it is, then you can't price it with certainty.
I just want to know what innovator will discover the tunnelling of debt to regions that are physically impossible.
Third-worst case: They suspend the dividend for a while.
Second-worst case: They issue stock.
Worst case: Government bailout.
Citigroup will not fail; it just won't happen, period. The stock may become toilet paper -- frankly, I would advise against making any bets on that, either way -- but the institution will survive.
It doesnt matter how many billions of Certificates for Moon Dust the bank has. The only thing that matters is the revenue stream Citi has to provide for the underpinning liabilities in the coming few years until all these assets are inflated away by the Ben dude.
And they insure them! Bye bye RDN, PMI, etc..! If these guys flounder, and insurance for these complex derivatives go away or cant be paid out upon losses being claimed..>WATCH OUT!
I talked about Level 3 assets on SAT as Nov 15th markst the accounting deadline which will bring about an adjustment of what classifies as Level 3. This is a problem.
I have no clue where the share prices of financials are headed (i have a good guess though) but what makes this all very interesting is that debt doesn't vaporize like the old crappy dot.com paper. The banks will wear this stuff for a while and it will restrict how much they can lend. Take a look at what happened to the Japanese banks when they failed to address the problems. This could really drag on for a long time. Oh well.
So even a 10% haircut on these assets (conservative these days...) means another >$10bil writedown from Citi. Combined with their initial poorly capitalized position, and the question becomes: how long can they survive?
with recession and further severe house price falls, we may get to the point of real solvency questions at citi. but they started this mess with $128bn in capital to write down against. total writedowns so far are around $15bn. another $10bn would make it $25bn.
i agree that that won't be the limit of the writedowns, and citi will get into trouble vis-a-vis its capital requirements very quickly and have to raise capital (as meredith whitney noted). but as to solvency -- we aren't there yet. with regulatory forebearance, they can probably survive quite a long time.
Financial mathematics is currently almost completely dominated by stochastic calculus. Presenting a completely independent approach, this book applies the mathematical and conceptual formalism of quantum mechanics and quantum field theory (with particular emphasis on the path integral) to the theory of options and to the modeling of interest rates.
Or maybe you'd like to read the paper Quantum Finance; from the abstract:
Quantum theory is used to model secondary financial markets. Contrary to stochastic descriptions, the formalism emphasizes the importance of trading in determining the value of a security. All possible realizations of investors holding securities and cash is taken as the basis of the Hilbert space of market states.
There are going to be many, many, many 'too big to fail' stories over the next two years. C- will just be another in the queue, along with GM, Ford, Countrywide, and the states of California and Florida.
For all those who believe that "Manhattan real estate only goes up" (never mind what it looked like in the late 70s thru early 90s), the catalyst for this being incorrect is on the launching pad. Not sure how many Wall Street salaries are about to be sacrificed, but it won't be a low number.
They try to hedge them. That's why those ABX indices are so low. Anything not already hedged as of a couple weeks ago would probably be too expensive to bother with now.
Level 3 inputs are unobservable inputs for the asset. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset (or similar assets) at the measurement date. However, the fair value measurement objective remains the same, that is, to obtain an exit price in the principal market from the perspective of a market participant that holds the asset. Therefore, unobservable inputs shall reflect the reporting entitys own expectations about the assumptions that market participants would use in pricing the asset in a current transaction (including assumptions about risk), even if the market participant assumptions are different than the reporting entitys own expectations. The reporting entity may not ignore information about market participant assumptions that is reasonably available without undue cost and effort (FAS 157, par. 30).
but they started this mess with $128bn in capital to write down against. total writedowns so far are around $15bn. another $10bn would make it $25bn.
That's true, but none of this also takes into account the $80bil(?) in SIVs that they'll have to deal with. The $130bil in level 3 assets are only the stuff that's on-balance sheet. The off-balance stuff is another nearly $100bil.
And how much of their level 1 and level 2 stuff is going to decline further in the next few months? Just because there's a solid price for them doesn't mean that price isn't going to significantly decline. Indeed, I don't know the details but I suspect the $10bil in writedowns they announced aren't from their level 3 or their off-balance sheet stuff.
Anyway, not to sound like I'm wearing a tin-foil hat, but I think Citi is sitting on $200bil of toxic waste, and that's a lot even for someone as big as Citi (almost as much as the entire S&L debacle...) to swallow.
I do agree that politically it can't be allowed to fail (heck, BofA bailed out CFC for chrissake's), but economically, at some point, they might turn out to be underwater...
Some observers of current market conditions have asserted that market pricing is irrational, and they have suggested that entities should instead default to a model based measurement that is based on the economic fundamentals of the asset. However, FAS 157 states that the use of an entitys own assumptions about future cash flows is compatible with an estimate of fair value, as long as there are no contrary data indicating the marketplace participants would use different assumptions. If such data exist, the entity must adjust its assumptions to incorporate that market information [emphasis added] (FAS 157, par. C85, and CON 7, par. 38).
You have fallen into the pit.
You are now on Level 3.
The lights here are very dim.
To the East are rumored to be great treasures.
On the ground is a US Dollar. PICK UP DOLLAR
As you attempt to grab the greenback it shrinks into nothingness and fades away. GO NORTH
It is very dark here. You are likely to be eaten by an M-LEC. LIGHT LAMP
As you light the lamp as sorts of evil creatures scurry away. In the corner you see an injured CDO...
Anyway, not to sound like I'm wearing a tin-foil hat, but I think Citi is sitting on $200bil of toxic waste, and that's a lot even for someone as big as Citi (almost as much as the entire S&L debacle...) to swallow.
i'm pretty dire myself about the whole issue, lune, to the point where i wonder if the only sensible thing to do isn't just to get your accumulated wealth into swiss francs. this has a long way to run, imo, and in a deep recession i wouldn't be surprised if you were right.
but i do expect government to attack this problem from every angle -- including a lot of regulatory forebearance. i think fasb will make room for citi (and others) to avoid sudden marks to reality, and allow it to use income over years to repair its balance sheet -- the japan model of depression avoidance.
the bigger questions in my mind are of the state of government and consumer finance in the aftermath. 1990s japan was a massive creditor nation with a high savings rate; 2007 america is a massive debtor nation with no savings rate at all. can government imitate japan without precipitating a higher order of financial crisis?
Inflationists that are looking only at how much money is being creaed, ought to take a look at how fast that money is moving. Velocity is the other part of the equation. Easy to forget though... probably the smartest group of analysts I know of forgot it for awhile. They just rediscovered the metric and switched from wildly bullish to bearish.
I understand "too big to fail." This just seems too much like "too influential to be held responsible." Citi "won't" cut the dividend because the stock price would be affected? Every effort to date by every participant seems directed at thwarting market discovery.
The idea of using Hamiltonian equations in finance is really silly. This isn't physics, despite economists' hopes that it is - more like an advanced way to count the number of angels which might fit on the head of a pin (under certain assumptions)
This is the kind of crap that made me drop out of my PhD in econ program.
You have fallen into the pit.
You are now on Level 3.
The lights here are very dim.
To the East are rumored to be great treasures.
On the ground is a US Dollar.
PICK UP DOLLAR
As you attempt to grab the greenback it shrinks into nothingness and fades away.
GO NORTH
It is very dark here. You are likely to be eaten by an M-LEC.
LIGHT LAMP
As you light the lamp as sorts of evil creatures scurry away. In the corner you see an injured CDO...
rcryan--as a physicist, I completely agree with you. There's no deep reason quantum finance should be any more successful as a model than anything else. If a quantum model works (which I don't know or care enough to say), it is a numerical accident, not a deep truth.
On the call this morning, Citi's CFO described the assets as "super senior". So I guess these level 3 assets are "super senior" unobservable crap, which is clearly far better than investment-grade observable crap.
Comparisions to what Japan did are interestign thought expiriments. I seme to recal at oen point the problem The Japanese fed was complaining about was that the Japanese public was saving too much, and not spending. At least that was part of their excuse for lowering their interest rate to near 0.
The U.S. have the excact opposite problem. I'm interested if the same same governemtn actiosn will cause the opposite to happen here as what happened in Japan.
The question is: Is the opposite of muddling through, gangbusters growth, or depression?
In other words, that $8 to $11 billion additional they just mentioned is an absolutely unverifiable, unknowable, uneducated guess.
Isn't that just swell.
Several days ago, someone (I believe "Clyde") posted a series of comments related to the mathematical complexity of modeling the cashflows of your run-of-the-mill mortgage-backed CDO.
Does anyone recall the article to which the comments were attached. Before I delve into understanding "Level 3" accounting, I need a refresher on the mathematical masturbation involved in marking-to-make-believe.
can government imitate japan without precipitating a higher order of financial crisis?
And that may be the only reason why Citi might be allowed to fail. After all, they won't be the only company coming to the govt. with begging bowl in hand. Can the govt. really afford to carry out a massive bailout of the financial services industry (and perhaps the underlying real estate industry, lest the commoners get too upset at being left out) at the current juncture?
Personally, I have to say the numbers have become so colossal that we're quickly losing our sense of scale. When single banks can post losses in the tens of billions, this is no longer a "contained" problem. The annual govt. revenues of all but perhaps the 20 largest countries is less than the amount of losses announced by Wall st. in the past few weeks.
If estimates of real estate declines of around $1 trillion are correct, we're in deep trouble. Is there any country around willing or able to buy 1 trillion dollars (on top of what we need every day to keep buying our SUVs and plasma screens) to help us out...?
Sorry to sound so pessimistic. Maybe I should become a goldbug
The amount of losses that financial institutions have already recognized - $20 billion is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake in subprime alone is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market and the related leveraged loans market is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and safe (AAA and AA) securities.
If too big to fail mean Citi won't go BK, I agree with it 100%. There willb e too much disruption on the economy if all C transaction go to BK court and wait there. It can bring down our entire economy. However it is not to say that the current shareholders cannot loss most of their money. If thing get really bad for Citi, bank regulator can force Citi to merge with a rival bank. Question is who is big enough to absorb Citi? And stock price can continue to erode as more write off is coming, asset sales to raise regulatory capital and may be divy cut...
The FED may be powerless, but we can always sell most of the USA to China, if sufficiently marked down. I mean our real assets. To begin with, maybe China will take Citigroup off our hands so the taxpayers don't have to take the hit.
Considering the state of sophistication, transparency, et al of the Chinese banking system Citigroup would be an improvement. Heck, we exported our inflation, why not our millstones?
If Citibank follows the Japanese bank model, you can expect their first steps to be pulling back from international markets and divesting non-core assets (Salomon?) in a downward spiral of attempting to shore up capital against a balance sheet that's eroding even more quickly.
Level 3 does not necessarily indicate worthlessness. For example, equity options maturing in more than 15 years are considered level 3. Blame FASB's strict standards under FAS 157.
My suspicion: they all went into Level 3 assets INTENTIONALLY.
Why? Despite the fact that valuation is so hard that it's based "on management's best guess?" No, precisely because that situation allows "mark-to-market." That means, essentially, unauditable adjustments in valuation of $148B in assets, every quarter, to satisfy management's need to hit the number.
This is exactly what Enron did. Exactly. Exactly. Thank god our auditing firms, the SEC, the financial press, all have learned from past mistakes, so these things could never happen again.
I understand "too big to fail." This just seems too much like "too influential to be held responsible." Citi "won't" cut the dividend because the stock price would be affected? Every effort to date by every participant seems directed at thwarting market discovery.
I think there if a fine line between "too big to fail" and "too big to prop up anymore".
A reminder here is that Bernanke is an expert in both causes and effects related to the Great Depression. I wondered why he was fast-tracked to become the FED's chairman?
Right now I don't now if citi is going to fail or not, but I would like someone who believes it can't fail to elaborate. What specifically makes it impossible that citi could fail? Who will hurt the most? Which specific institution have a interesting in it staying afloat and which ones what to see it fall?
I think that even if it is in the interests of all the banks to get together and try to save citi, each one is going to try to contribute as little as possible, especially with that giant sucking sound in the background. I think its possible that this cartel is too scared to cooperate.
Reading it over, C- will die from arrows it takes from multiple angles:
"...The Company's U.S. Consumer Mortgage portfolio consists of both first and second mortgages. As of September 30, 2007, the first mortgage portfolio totaled approximately $155 billion, of which 84% ($131 billion) had a FICO (Fair Isaac Corporation) credit score of at least 620 at origination (wow, how high!); the other 16% ($24 billion) were originated in the FICO=90% at origination, where higher levels of delinquencies were observed during the third quarter of 2007..."
Heck, the trick here, post-mortem, will be to identify which of the multiple wounds killed the patient!
CAPITAL RESEARCH AND MANAGEMENT COMPANY\t230,517,177\t4.63\t$11,823,226,008\t30-Jun-07
Barclays Global Investors UK Holdings Ltd\t179,123,520\t3.60\t$9,187,245,340\t30-Jun-07
STATE STREET CORPORATION\t150,346,292\t3.02\t$7,711,261,316\t30-Jun-07
AXA\t144,848,238\t2.91\t$7,429,266,127\t30-Jun-07
VANGUARD GROUP, INC. (THE)\t139,606,101\t2.81\t$7,160,396,920\t30-Jun-07
WELLINGTON MANAGEMENT COMPANY, LLP\t104,426,206\t2.10\t$5,356,020,105\t30-Jun-07
FMR CORPORATION (FIDELITY MANAGEMENT & RESEARCH CORP)\t87,306,811\t1.76\t$4,477,966,336\t30-Jun-07
MORGAN STANLEY\t69,711,306\t1.40\t$3,575,492,884\t30-Jun-07
UBS GLOBAL ASSET MANAGEMENT (AMERICAS) INC\t68,769,985\t1.38\t$3,527,212,530\t30-Jun-07
Mellon Financial Corporation\t57,947,534\t1.16\t$2,972,129,018\t30-Jun-07
I know that when those "bears" have forcasted the demise of Citi, the knowledgable have called for reason and perspective, citing its size, capitalization, cash flow, whatever...
But what if the fundamental system of IB's has changed so much with respect to risk pricing, etc, that it's virtually imposible to remain solvent under the current method of operation.
Example: The systemic changes in the mortgage business over the last several years meant that anyone involved by definition was doomed to failure. Take Countrywide: If they were to try to operate say two years ago in a responsible way in pricing risk, and decide they would only make high rate loans (say 9%-10%) and require 20% down, this would mean they would get no business and die immediately. Or, they could continue to compete and die slowly like the other 179 lenders so far. They were forced to keep acting irrationaly to survive, a catch 22, die now or die later. Because they were well capitalized only meant the death was slower and more damaging. The game had changed. (like horseshoe makers, the large ones were no more insulated than the small ones when the car was invented, they only had more to lose and a slower death).
Why is Citi immune? If the systemic problems that killed off any and all mortgage brokers (not backed by the fed) no matter the size has in fact occurred, what if the same forces are in play with the IB's?
If, as in my Countrywide example, the problems lie outside the current strength of the individual IB, and are systemic, then any introspection of the company will tell you as much about their viability as looking at the stregth of the lenders 2 years ago. It's irrelevant. Their current value is unknowable. And if they all lose money then they all are worth zero.
If you think I don't know enough to know what I'm talking about, my response is that perhaps you know too much. You don't see the forest for the trees. If the problem lies outside the actual companies then those inside the companies won't see it....which seems to bearing itself out as CEO experts are seemingly the last to know what is happening to their industry.
They have an unmanageable accounting task in any sort of market hiccup:
They have receivables, as of 9/30/07, on $386 trillion of contracts/swaps!
(Admittedly, they have payables of $301 trillion against those).
I cannot fathom how their back office works with that sort of volume. In a panic, with volume spiking, it will take forever to sort through transactions.
"What specifically makes it impossible that citi could fail? Who will hurt the most? Which specific institution have a interesting in it staying afloat and which ones what to see it fall?"
Given C global reach, it is basically the whole world. Just think that all tranactions with C (whether C is the counter party, someone that will provide you with the loan, beinging the middle etc.) would be at C management discretion. Once any company go into BK court, the suvival of the business is the top priority and court can eject contracts and run it a pretty much the way they see fit. And the counter parties would have to wait in line as a claimants for C asset for the damage. In the mean time, all the counter parties will have to scramble for money (if money is tie up with Citi or C is supposed to provide ), to find another counter party for risk arbitrate (if C holder the counter party risk) etc. Just think about how many other parties dealing with C that would be force into bk becuase of liquidity or regulatory rules caused by delay..
Alwaleed controls 95 percent of Kingdom Holding, which in turn owns 3.6 percent of Citigroup's capital, according to the Saudi company's listing prospectus published in July.
=======================
is taken as the basis of the Hilbert space of market states.
Andrew Foland | Homepage | 11.05.07
I wrote up an exposition titled "Hilbert is Nuts" - actually its Filbert {/hazelnuts}( but what's a letter when we are trying to be funny - the a**hole prof, whose name I simply cannot remember graded it A- ( or something like that ).
If you are really questioning things you HAVE to look at those deep foundations of math. I'm still looking 30+ years later and its STILL a load of bollocks (Wolfram may be on to something though ) - but I have no better viewpoint - yet.
Problems in the subprime mortgage sector are could "get worse before they get better," Federal Reserve Governor Randall Kroszner warned today.
He gave two reasons for the pessimistic outlook. First, "all indications are that housing activity is continuing to weaken" and house prices in general will be "sluggish for some time."
Common sense, but revealing once I see it in black and white; if the public panics, they are toast: they have U.S. savings and time (CD) deposits of $205B and OUS deposits of $516B.
Yep, there are multiple ways -- Level 3 write downs; reduced collections on its held mortgages; run on deposits -- for C- to die.
The problem is leverage, and it is systemic. The ability to keep assets(which themselves are highly leveraged, AND whose underlying collateral((the U.S. consumer is highly leveraged))) off balance sheet(temporary, it seems) there by INCREASING the already ridiculously under capitalized(leveraged) banks' risk of insolvency.
The entire system has been built on unbalanced, lunacy. Lunacy created by an inflationist monetary policy.
What needs to be understood is that fiat's usually obvious dependency on faith is something that has MUST have been lost in the minds of the fools who purvey such a reckless policy.
Hey everyone, tell me this. C has over 2.2 trillion in assets alone. What if those assets decrease by 10% over the next year? C market cap is less than 200 billion now. Too big to fail? Nothing is impossible with that amount of leverage. That is why what is coming will be like nothing ever seen before.
I think the IB's are losing money on all business and worse yet they don't know it.
What do you do if you find yourself in a business where all your competition is willing to lose money on every transaction? (even if they THINK they are making money.)
Answer: You chose to lose money too or stop doing business.
Just like the lenders who were forced to lose money on every deal or die, IB's are in the same position.
Uh the Chinese banking system is so stuffed full of bad loans Citigroup looks like a paragon of banking virtue in comparison.
Turbo
Good call. China is at least as Ponzi as the U.S. Talk about manipulated markets, hidden NPL's, real estate bubble, manufacturing bubble, powderkeg of social instability, etc. China is a "story", nothing more and nothing less.
Does anyone know whether it's legally possible for Citigroup (the holding company with I think most of the investment banking exposure) to fail while Citibank (the consumer bank) gets saved somehow -- by a merger, maybe?
Frederick Demetrius, this is ex-SIVs. Citi isn't responsible for losses at the SIVs (at least not on paper), so they don't have to include the assets or liabilities on their balance sheet.
Does anyone know how much money might have to be put back onto Citi's balance sheets, i.e. how many legal contructs are out there that strict(er) accounting rules would force Citi to acknowledge. This strikes me as the place to look first when contemplating BK for Citi.
I agree with the comments about China. However, I also believe good 'ole whacky Jim Rogers. China in 2007 is like the U.S. in 1907 and the U.K. in 1807. Over the next 50 yrs If you have assets tied to their economy you will do very well. I also believe starting in 2008 until 2015 you are going to experience some serious pain no matter where you are invested.
B-, I don't see where C details what amount of the deposits are insured.
Against the $813B of deposits, they have truly liquid assets of $480B (cash, deposits, repos).
Hey, that would be a nice sized short term loan from the discount window in the case of a full-out run: $813B to pay out - $480B cash on hand = $333B loan from the discount window!
"There are going to be many, many, many 'too big to fail' stories"
Let me speak the unspeakable. I am very concerned if USA should belong to the list; especially once the entitlement tsunami kicks in. I just can't understand how we can prevent joining the club of Brazil, Argentina & Russia in view of our unfunded liabilities.
If you're gonna call for a Citi BK, you're gonna have to show your work. Throwing a 10% writedown against an entire asset base and arguing that will cause BK is um, uncompelling shall we say.
The key BK questions are:
1) Are the core businesses producing cash? Are they producing cash insufficient to service debt? References to the 10-Q would be appreciated.
2) Is the balance sheet "re-financable," that is, is the commercial paper program sustainable? if not, why not?
3) Are the fixed costs so permanent that the company cannot reduce costs quickly enough to meet a new environement? In this business, why would that be so?
4) They have a $2.7 billion quarterly dividend that is optional. What would the financial impact of an increase in cash of $2.7 billion each quarter be?
Now, are there things to be worried about? Sure. But BK seems like an awful big stretch to me. I am happy to be educated otherwise.
Thank you for the interest you have expressed in the Sales Liaison position with Citi Global Wealth Management. At this time we regret to inform you that the search for this position has been placed on hold.
Global Wealth Management is a dynamic organization and our staffing needs are always changing. We encourage you to explore other career opportunities within Citigroup by visiting our careers website, Careers at Citi If you are interested in applying for another position, please submit your application on-line.
We appreciate your interest in Citi Global Wealth Management and wish you success in your job search.
1) Are the core businesses producing cash? Are they producing cash insufficient to service debt? References to the 10-Q would be appreciated.
We don't know. 10-Qs are not adequate to this task.
2) Is the balance sheet "re-financable," that is, is the commercial paper program sustainable? if not, why not?
The answer is "no." Citi is too big. The CP markets are too locked up. The math clearly indicates that rolling over long term exposure at short term rates that are higher is clearly unsustainable.
"Over the next 50 yrs If you have assets tied to their economy you will do very well."
Although there are resemebalences (sp?), China is very different than the U.S. 100 years ago. Have you not heard of all the unrest amoung the Chinese peasants? That their whole middle-class has invested their life-savings into the stock market? When their stock-market crashes and their banks crash, most of those new middle-class people will find themselves to be peasants again. And they won't be able to restart as the U.S. and the rest of the world will be starting their decade or two long recessiondepression. And believe me, they will take their frustrations out upon the government there.
Doesn't the likelihood of Citigroup's BK depend entirely on the degree to which Citigroup is legally allowed to get financing from it's banks? The June 30 filings with FDIC and NIC indicated that Citigroup only had $30 billion of its own (non-FDIC affiliate related) capital. If the banks have only a limited ability to support Citigroup, it may not take much in write-downs to BK Citigroup.
If you understand how the holding co. - FDIC insured affiliate relationship is likely to work out, it would be great to know more.
On the CP, Citi has been refinancing all through the credit market mess...just sayin'
How can you be sure? A lot of banks have revealed that -- presumably due to backstop credit obligations -- they have been buying the CP of their conduits and SIVs. How can anyone know what was sold in the market and what looks like it was sold on the market?
Banker,
I posted this on another thread this morning and please excuse the lack of detail which you can find there.
The Balance Sheet has become suddenly bloated over the last year, incredibly so. NI fluctuates but has not kept pace with Assets. Cash flows are almost neutral. This is usually very bad for a company at an obvious inflection point.
You know better than I the things a company this size can do. There's a direct line to the Fed, White House and Justice Dept. Citi could survive with a disguised govt bailout or by drowning everything around them.
I'm no expert at reading bank financials, but I don't think much expertise is required in this case as I do not have faith in their valuations.
In my post above, I meant to reference the high-level financials on Yahoo. No detail, but the basic ratios and trends are not good unless the company's in a state of high-growth.
Good questions about evaluating the risk of bankruptcy. Since I'm one of the ones that is openly pondering the question, let me be more precise in what I'm asking. I don't believe Citi will be BK in the sense that they'll end up in bankruptcy court, delisted from the NYSE, etc. Banks don't usually go that way. Recall that no IB has ever gone bankrupt. They merely "merged", got bought out, or quietly divested their remaining assets and renamed themselves (although many of them weren't public companies).
So I guess my definition of a Citi bankruptcy would be:
1) Inability to meet capital reserve and other banking solvency regulations, forcing a fire sale of assets or other desperate means to avoid the regulators shutting it down
2) Forced merger with another bank
3) Essentially zero or negative shareholder capital
4) Loss of trust among other banks as a counterparty. Citi is a large market maker in the OTC currency markets, debt markets, and just about every other financial market one cares to name. That's based on counterparty trust. If that erodes to the point where people actively avoid trading with Citi, then that essentially means no one counts on their solvency.
Anyway, I'm not advocating a run on Citi. Unless your savings account has >$100k, you're insured regardless. And they won't be visiting a bankruptcy court anytime soon. But I guess my definition of de facto insolvency is a little broader than that. Thoughts?
I agree on the difficulty with the 10-Q's. But can you provide any evidence that the company is bleeding cash at this point?
Isn't their capital reserve balance less than 1/2 normal? Is that not an important component of "cash on hand?" I am worse than stupid as to the exact and technical wording but what I see is is impaired assets and delayed markdowns and attempts to move off balance sheet and excessive leverage and closed borrowing conduits. All pointing to liquidity shortages.
And right on schedule comes this article. Note their emphasis on Citi's counterparty credit ratings...
S&P may downgrade Citigroup's ratings; cites additional markdowns, CEO departure
November 05, 2007: 02:48 PM EST
SAN FRANCISCO, Nov. 5, 2007 (Thomson Financial delivered by Newstex) -- Standard & Poor's (NYSE:MHP) Ratings Services on Monday put Citigroup (NYSE:C) Inc.'s AA long-term counterparty credit rating on creditwatch with negative implications, citing additional markdowns at the financial-services firm and uncertainty in the wake of Chief Executive Charles Prince's resignation.
The agency said it also placed the AA+ long-term counterparty credit rating of Citibank N.A. New York, N.Y., on creditwatch negative.
'Citigroup's announcement that it would have to make $8 billion to $11 billion of additional markdowns on its CDO exposures is unwelcome news after the very weak third-quarter results,' S&P credit analyst Tanya Azarchs said in a statement.
S&P also said CEO Prince's resignation could signal a period of strategic uncertainty. If the new management were to significantly move to make the firm less diversified through asset sales or other means, it would be negative for ratings.
The agency said it plans to meet with Citigroup's management to determine its longer range prospects in terms of loan quality and reserve requirements, as well as the implications for changing strategies in its investment bank. S&P said it would also examine the firm's investment banking operation's risk management.
Katherine Hunt
Copyright Thomson Financial News Limited 2007. All rights reserved.
I have a question.
If the FedGov can prevent Citi from failing. Why can't they then prevent any other bank from failing also? Just do the same games and tricks. If that's not possible, then why do so many of you think it will work for Citi?
Several IB's have gone belly. Drexel the most recent big one.
Your definition of BK is simply braoder and different from what BK means. It is a specific term with a specific meaning. Let me adress your other possibilities:
1) Meeting Reg requirements-I assume this is an ongoing process for ALL banks and IB's right now.
2) Forced merger-I have already raised this as a possible and if things get really bad at Citi, I think this is what happens.
3) #2 happens first
4) That would immediately lead to a technical BK. This scenario is what kills financial insitutions.
GAAP and regulatory bodies have specific definitions, you don't like'em?
Oh really? And they apply equally and don't change? Good, here's my check for $11b, please transfer $10 billon to my account. I'm good for it because my lawyers say that my beanie baby collection last traded cumulatively at $14 billion in 1998. All GAAP correct.
The following table represents the carrying amounts and classification of consolidated assets that are collateral for VIE obligations, including VIEs that were consolidated prior to the implementation of FIN 46-R under existing guidance and VIEs that the Company became involved with after July 1, 2003:
In billions of dollars Sept. 30,2007
Cash................................1.7
Trading acct assets..........24.5
Investments....................27.0
Loans..............................9.5
Other assets....................4.2
Total assets
consolidated VIEs.............66.9
The following table represents the total assets of unconsolidated VIEs where the Company has significant involvement:
ABCP conduits.................73.3
SIVs................................83.1
Other vehicles.................27.0
CDOs..............................84.2
Mortgage-related.............11.9
TRUPS............................11.7
Structured finance/other.52.2
Total assets
unconsolidated VIEs........343.4
The Company's maximum exposure to loss as a result of its involvement with VIEs that are not consolidated was $141 billion and $109 billion at September 30, 2007 and December 31, 2006, respectively. For this purpose, maximum exposure is considered to be the notional amounts of credit lines, guarantees, other credit support, and liquidity facilities, the notional amounts of credit default swaps and certain total return swaps, and the amount invested where Citigroup has an ownership interest in the VIEs. This maximum amount of exposure bears no relationship to the anticipated losses on these exposures.
Maximum Exposure
In billions of dollars September 30,2007
ABCP Conduits..................69
SIVs..................................3
CDOs...............................43
Other structured fin.........26
Total..............................141
Citi' provided liquidity to the SIVs at arm's-length commercial terms totaling $10 billion of committed liquidity, $7.6 billion of which has been drawn as of October 31, 2007. Citigroup will not take actions that will require the Company to consolidate the SIVs
Wow, you can really see the advantage of SIVs to conduits for Citi. Seemingly, the company's maximum exposure to SIV losses is "just" a few billion. So, why is Citi fighting so hard for these SIVs? (And I don't want to hear the unbelievable tales that it's for their "reputation"...)
All I can think is that some of these "arms-length" transactions will turn out, like Merrill, to have actually left large chunks of risk buried in Citi's books. Anyone have a better explanation?
Mr. Prince kept dancing right over the cliff. Solvency comes into question on many of the big names because of Level II and Level III holdings. I believe GS has 50% of it's assets in Level II and III. Scary seems to fit being so close to Halloween.
In this context, think of reputation as the currency that allows you to trade. It is that important.
Thanks for the insight... but if there aren't any buried (risk) bodies here, I still wonder how long Citi will fight before throwing the SIVs under the bus and focusing on its own, considerable, problems. Reputation may be queen, but cash is king.
[biting tongue trying to avoid a "prince" pun... ouch that hurts...]
In this context, think of reputation as the currency that allows you to trade. It is that important.
And that's where the cashflow comes (fees) that keeps them out of BK even if some question their solvency... if you keep making the nut every month no one questions the asset quality all that much... start having cashflow problems and the 'going concern' question gets raised... that's death.
People who have never run a business - even a small one like mine - have no idea how important on going cashflow is... it is the oxygen of business.
Dry,
Have you seen the Statement of Cash Flows? Have you seen the last 4 quarters' Balance Sheets? The rate of bloat is incredible. This is not a high-growth phase.
I didn't look at the notes or much else beyond the level one detail on Yahoo Finance, but that's not a profile of a company poised for a slowdown.
Medicine,
Good point. Many here have talked about "Off Balance Sheet...". The problem is that VIE's have a way of staying ON the Balance Sheet, even when they don't belong. It's the subsequent revaluations of the VIE's that never are recorded.
Citigroup is not under any contractual obligation to extend liquidity to the seven ugly sisters. Ultimately, the bank could just walk away and leave investors holding the bag. As Banker informed - huge reputation risk. Further, see the ABCP conduit exposure? Full committment to extend liquidty should the conduits be frozen out of the CP markets. Further still, the kicker with the SIVs has to do with the leverage. There is a very small equity base which is leveraged about 12 - 14 times. So a small haircut of say, 2% on the assets could lead to about a 25% knock on the SIV's NAV. (Citi SIVs NAVs were recently quoted at around 73%). No way they want this on the balance sheet, and they can't punt it because then no one would buy the CP to fund the conduits. Bad, bad, very very bad.
Level 3 assets are not worthless, but it is a pretty good bet that they are worth less than carried on the balance sheet at. The Fed really should be ordering them to eliminate the dividend now and stop any share repurchase activity. Next step would be to start laying off loan officers en mass. With its reduced capital levels, the last thing they should be doing is extending more loans. There will be substantial regulatory forebarence and no C will not go under. It will be a crappy stock to own for a long time, but it will not drag down the whole system. Not sure about the forced take over idea, what bank would be big enough to do so, but not be so big that they would not breach the 10% deposit market share cap? if that could be waved, a merger between JPM and Citi could maked some sense. you would be able to shut down oh say 700 branch offices and not really lose any depositis. How many corners in NY have both a chase and a citi branch on them. This was the model for the Chemical/Manny Hanny/Chase series of bank consolidation. Worked out pretty well at the time. I would pretty much be avoiding the financial sector right now. if you need exposure (ie prospectus says you cant go naked in a sector) stick to P&C insurance names. if you need to have a bank, look at ICICI Bank (IBN $65), they should be as well insulated as anyone from US sub price and pier loan problems, a lil pricy though, and might want to wait for a lil pull back to the high $50's where there is good technical support, but very solid growth prospects. The fundimential institution is much more solid than any of the big US banks.
Well, they do hedge 'em. Not sure how, but they try...
This is just the tip of banking stress iceberg. Make sure your life jacket is made of physical gold or silver.
Fireworks
Bring on Heisenberg - we spotted this thing in level 3, but we can't tell how fast it is moving. (But it sure looks from the probability distribution like it's heading down.)
Heh. "Unobservable."
I understand now. It's Shroedinger's CDO! It keeps its value as long as you don't look at it...
(Aside: Erin Burnett actually pronounced it "shittygroup" this morning. I caught it on Tivo and I'll upload it to YouTube tonight or tomorrow.)
maybe they intend on moving the level 3 assets into Mary Leak (aka M-LEC)
Boy thats a lot of toilet paper..
Here I will lend CITI my personal crying towel...
o wait no I wont, let them eat dead crow.
So even a 10% haircut on these assets (conservative these days...) means another >$10bil writedown from Citi. Combined with their initial poorly capitalized position, and the question becomes: how long can they survive?
The death watch begins (all bets are off if Uncle Ben comes to the rescue though).
I like the Heisenberg reference.
If you can price it with certainty, you can't know what is in it or where it is, but if you know precisely what it is, then you can't price it with certainty.
I just want to know what innovator will discover the tunnelling of debt to regions that are physically impossible.
Ahhhh, the holy grail...
lune --
Citigroup is literally "too big to fail".
Third-worst case: They suspend the dividend for a while.
Second-worst case: They issue stock.
Worst case: Government bailout.
Citigroup will not fail; it just won't happen, period. The stock may become toilet paper -- frankly, I would advise against making any bets on that, either way -- but the institution will survive.
It doesnt matter how many billions of Certificates for Moon Dust the bank has. The only thing that matters is the revenue stream Citi has to provide for the underpinning liabilities in the coming few years until all these assets are inflated away by the Ben dude.
"Well, they do hedge 'em."
And they insure them! Bye bye RDN, PMI, etc..! If these guys flounder, and insurance for these complex derivatives go away or cant be paid out upon losses being claimed..>WATCH OUT!
I talked about Level 3 assets on SAT as Nov 15th markst the accounting deadline which will bring about an adjustment of what classifies as Level 3. This is a problem.
http://www.urbandigs.com/2007/11/level_3_assets_credits_next_co.html
I have no clue where the share prices of financials are headed (i have a good guess though) but what makes this all very interesting is that debt doesn't vaporize like the old crappy dot.com paper. The banks will wear this stuff for a while and it will restrict how much they can lend. Take a look at what happened to the Japanese banks when they failed to address the problems. This could really drag on for a long time. Oh well.
So even a 10% haircut on these assets (conservative these days...) means another >$10bil writedown from Citi. Combined with their initial poorly capitalized position, and the question becomes: how long can they survive?
with recession and further severe house price falls, we may get to the point of real solvency questions at citi. but they started this mess with $128bn in capital to write down against. total writedowns so far are around $15bn. another $10bn would make it $25bn.
i agree that that won't be the limit of the writedowns, and citi will get into trouble vis-a-vis its capital requirements very quickly and have to raise capital (as meredith whitney noted). but as to solvency -- we aren't there yet. with regulatory forebearance, they can probably survive quite a long time.
Quantum Finance: Path Integrals and Hamiltonians for Options and Interest Rates
From the Amazon Book Description:
Financial mathematics is currently almost completely dominated by stochastic calculus. Presenting a completely independent approach, this book applies the mathematical and conceptual formalism of quantum mechanics and quantum field theory (with particular emphasis on the path integral) to the theory of options and to the modeling of interest rates.
Or maybe you'd like to read the paper Quantum Finance; from the abstract:
Quantum theory is used to model secondary financial markets. Contrary to stochastic descriptions, the formalism emphasizes the importance of trading in determining the value of a security. All possible realizations of investors holding securities and cash is taken as the basis of the Hilbert space of market states.
I give the patient one year.
There are going to be many, many, many 'too big to fail' stories over the next two years. C- will just be another in the queue, along with GM, Ford, Countrywide, and the states of California and Florida.
C- will be allowed to fail.
Well, I'm sure they were insured in the Cayman Islands.
Just hope the claim doesn't come in the mail to the Caymans and the mailman finds screwholes in the door where the nameplate of the insurer was..
For all those who believe that "Manhattan real estate only goes up" (never mind what it looked like in the late 70s thru early 90s), the catalyst for this being incorrect is on the launching pad. Not sure how many Wall Street salaries are about to be sacrificed, but it won't be a low number.
I like the Graham/Buffet:" If is requires more than a back of the envelope calculation,.."
Maybe we're in the many worlds scenario; we just got stuck in the wrong one.
How about string theory? There are more dimensions to this than you can see.
And don't forget the strong anthro-centric view, this is all happening because we're the end-all an be-all of creation.
They try to hedge them. That's why those ABX indices are so low. Anything not already hedged as of a couple weeks ago would probably be too expensive to bother with now.
Second-worst case: They issue stock.
HAhahaaaaaaaaaaaa
here's CAQ on level 3 valuations:
Level 3 inputs are unobservable inputs for the asset. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset (or similar assets) at the measurement date. However, the fair value measurement objective remains the same, that is, to obtain an exit price in the principal market from the perspective of a market participant that holds the asset. Therefore, unobservable inputs shall reflect the reporting entitys own expectations about the assumptions that market participants would use in pricing the asset in a current transaction (including assumptions about risk), even if the market participant assumptions are different than the reporting entitys own expectations. The reporting entity may not ignore information about market participant assumptions that is reasonably available without undue cost and effort (FAS 157, par. 30).
but they started this mess with $128bn in capital to write down against. total writedowns so far are around $15bn. another $10bn would make it $25bn.
That's true, but none of this also takes into account the $80bil(?) in SIVs that they'll have to deal with. The $130bil in level 3 assets are only the stuff that's on-balance sheet. The off-balance stuff is another nearly $100bil.
And how much of their level 1 and level 2 stuff is going to decline further in the next few months? Just because there's a solid price for them doesn't mean that price isn't going to significantly decline. Indeed, I don't know the details but I suspect the $10bil in writedowns they announced aren't from their level 3 or their off-balance sheet stuff.
Anyway, not to sound like I'm wearing a tin-foil hat, but I think Citi is sitting on $200bil of toxic waste, and that's a lot even for someone as big as Citi (almost as much as the entire S&L debacle...) to swallow.
I do agree that politically it can't be allowed to fail (heck, BofA bailed out CFC for chrissake's), but economically, at some point, they might turn out to be underwater...
continued:
Some observers of current market conditions have asserted that market pricing is irrational, and they have suggested that entities should instead default to a model based measurement that is based on the economic fundamentals of the asset. However, FAS 157 states that the use of an entitys own assumptions about future cash flows is compatible with an estimate of fair value, as long as there are no contrary data indicating the marketplace participants would use different assumptions. If such data exist, the entity must adjust its assumptions to incorporate that market information [emphasis added] (FAS 157, par. C85, and CON 7, par. 38).
Nemo-
Thanks for the reply. To add a 4th case- Citi "merges" with another bank (possibly a forced merger by the Fed ala Japan in the 90's)
You have fallen into the pit.
You are now on Level 3.
The lights here are very dim.
To the East are rumored to be great treasures.
On the ground is a US Dollar.
PICK UP DOLLAR
As you attempt to grab the greenback it shrinks into nothingness and fades away.
GO NORTH
It is very dark here. You are likely to be eaten by an M-LEC.
LIGHT LAMP
As you light the lamp as sorts of evil creatures scurry away. In the corner you see an injured CDO...
Aside: Erin Burnett actually pronounced it "shittygroup" this morning. I caught it on Tivo and I'll upload it to YouTube tonight or tomorrow.)
that's phuggin hilarious...
she 's hot, and funny
Anyway, not to sound like I'm wearing a tin-foil hat, but I think Citi is sitting on $200bil of toxic waste, and that's a lot even for someone as big as Citi (almost as much as the entire S&L debacle...) to swallow.
i'm pretty dire myself about the whole issue, lune, to the point where i wonder if the only sensible thing to do isn't just to get your accumulated wealth into swiss francs. this has a long way to run, imo, and in a deep recession i wouldn't be surprised if you were right.
but i do expect government to attack this problem from every angle -- including a lot of regulatory forebearance. i think fasb will make room for citi (and others) to avoid sudden marks to reality, and allow it to use income over years to repair its balance sheet -- the japan model of depression avoidance.
the bigger questions in my mind are of the state of government and consumer finance in the aftermath. 1990s japan was a massive creditor nation with a high savings rate; 2007 america is a massive debtor nation with no savings rate at all. can government imitate japan without precipitating a higher order of financial crisis?
Glad you picked this up. Wrote about the threat of level 3 assets in my post from this weeekend:
Boom2Bust.com » Blog Archive » Sunday Edition: November 4, 2007
I like that writing, Robert Cote!
Liquidty trap. What else is there to say?
Inflationists that are looking only at how much money is being creaed, ought to take a look at how fast that money is moving. Velocity is the other part of the equation. Easy to forget though... probably the smartest group of analysts I know of forgot it for awhile. They just rediscovered the metric and switched from wildly bullish to bearish.
I understand "too big to fail." This just seems too much like "too influential to be held responsible." Citi "won't" cut the dividend because the stock price would be affected? Every effort to date by every participant seems directed at thwarting market discovery.
Plus I'd add that there isn't much money being printed... only credit. They aren't the same thing.
The idea of using Hamiltonian equations in finance is really silly. This isn't physics, despite economists' hopes that it is - more like an advanced way to count the number of angels which might fit on the head of a pin (under certain assumptions)
This is the kind of crap that made me drop out of my PhD in econ program.
You have fallen into the pit.
You are now on Level 3.
The lights here are very dim.
To the East are rumored to be great treasures.
On the ground is a US Dollar.
PICK UP DOLLAR
As you attempt to grab the greenback it shrinks into nothingness and fades away.
GO NORTH
It is very dark here. You are likely to be eaten by an M-LEC.
LIGHT LAMP
As you light the lamp as sorts of evil creatures scurry away. In the corner you see an injured CDO...
Gold Robert Cote, pure gold. Thank you.
Every effort to date by every participant seems directed at thwarting market discovery.
exactly -- government's role is less to stop it than to slow it all down, imo, by colluding with the banks to obstruct rapid discovery as best it can.
well, they could get a lot of this money if the recouped executive pay over the past 5 years.
Level 3 Assets = Schrodinger's Cat
They are both dead and alive until you unseal the box to observe them.
Robert Cote
Usāmah bin Muhammad bin `Awad bin Lādin smiles and nods at you approvingly
You have fallen into the pit.
You are now on Level 3.
"Hello, footpad"
Robert Rubin appears.
rcryan--as a physicist, I completely agree with you. There's no deep reason quantum finance should be any more successful as a model than anything else. If a quantum model works (which I don't know or care enough to say), it is a numerical accident, not a deep truth.
Its All Gonna Break
T S U R U R A D I O · Error 404
Every effort to date by every participant seems directed at thwarting market discovery.
Naturally. The people in charge want to stay in charge, no?
This has to be one of the most intelligently funny CR comment threads ever. Thanks.
On the call this morning, Citi's CFO described the assets as "super senior". So I guess these level 3 assets are "super senior" unobservable crap, which is clearly far better than investment-grade observable crap.
Comparisions to what Japan did are interestign thought expiriments. I seme to recal at oen point the problem The Japanese fed was complaining about was that the Japanese public was saving too much, and not spending. At least that was part of their excuse for lowering their interest rate to near 0.
The U.S. have the excact opposite problem. I'm interested if the same same governemtn actiosn will cause the opposite to happen here as what happened in Japan.
The question is: Is the opposite of muddling through, gangbusters growth, or depression?
Oh, and Bacon Dreamz, I do believe Yacht Rock still lives on:
YouTube -
Robert Cote -
The next educational software we'll be buying for our kids. Go for it.
Robert C,
Thank you! [grins, rolls d20]
So, CITI's offering us Stated Assets? Sounds about right...
Ouch!!
Total Stockholder Equity 127,754,000 as of June 2007
In other words, that $8 to $11 billion additional they just mentioned is an absolutely unverifiable, unknowable, uneducated guess.
Isn't that just swell.
Several days ago, someone (I believe "Clyde") posted a series of comments related to the mathematical complexity of modeling the cashflows of your run-of-the-mill mortgage-backed CDO.
Does anyone recall the article to which the comments were attached. Before I delve into understanding "Level 3" accounting, I need a refresher on the mathematical masturbation involved in marking-to-make-believe.
can government imitate japan without precipitating a higher order of financial crisis?
And that may be the only reason why Citi might be allowed to fail. After all, they won't be the only company coming to the govt. with begging bowl in hand. Can the govt. really afford to carry out a massive bailout of the financial services industry (and perhaps the underlying real estate industry, lest the commoners get too upset at being left out) at the current juncture?
Personally, I have to say the numbers have become so colossal that we're quickly losing our sense of scale. When single banks can post losses in the tens of billions, this is no longer a "contained" problem. The annual govt. revenues of all but perhaps the 20 largest countries is less than the amount of losses announced by Wall st. in the past few weeks.
If estimates of real estate declines of around $1 trillion are correct, we're in deep trouble. Is there any country around willing or able to buy 1 trillion dollars (on top of what we need every day to keep buying our SUVs and plasma screens) to help us out...?
Sorry to sound so pessimistic. Maybe I should become a goldbug
Roubini, your bear hug for today:
The amount of losses that financial institutions have already recognized - $20 billion is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake in subprime alone is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market and the related leveraged loans market is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and safe (AAA and AA) securities.
"too big to fail."
If too big to fail mean Citi won't go BK, I agree with it 100%. There willb e too much disruption on the economy if all C transaction go to BK court and wait there. It can bring down our entire economy. However it is not to say that the current shareholders cannot loss most of their money. If thing get really bad for Citi, bank regulator can force Citi to merge with a rival bank. Question is who is big enough to absorb Citi? And stock price can continue to erode as more write off is coming, asset sales to raise regulatory capital and may be divy cut...
The FED may be powerless, but we can always sell most of the USA to China, if sufficiently marked down. I mean our real assets. To begin with, maybe China will take Citigroup off our hands so the taxpayers don't have to take the hit.
Roubini is a perma-bear, but like all perma-bears, he has been fairly accurate lately.
Anybody know off-hand if is there an equivalent of the (sub-prime only) ABX indices for the Alt-A and Prime MBS/CDS markets?
Completely off-topic but may be of some interest to readers here. A new report by the St. Louis Federal Reserve on the U.S. National Savings Rate:
http://research.stlouisfed.org/publications/review/07/11/Guidolin.pdf
It clears up one mystery for me. Back on July 31, the BEA revised away our negative savings rate to make it positive.
I was wondering what the hell happened back then.
By the way, financial innovation is given as a reason we dont have to worry about the lack of national savings.
Erin Burnett actually pronounced it "shittygroup" this morning.
Thanks a mil, that's a keeper.
Question is who is big enough to absorb Citi?
Considering the state of sophistication, transparency, et al of the Chinese banking system Citigroup would be an improvement. Heck, we exported our inflation, why not our millstones?
If Citibank follows the Japanese bank model, you can expect their first steps to be pulling back from international markets and divesting non-core assets (Salomon?) in a downward spiral of attempting to shore up capital against a balance sheet that's eroding even more quickly.
Whew, I was worried there a bit this morning:
Crude oil erases earlier losses, trading near record high
Uh the Chinese banking system is so stuffed full of bad loans Citigroup looks like a paragon of banking virtue in comparison.
Cote...I make a godcall: Oh great Bernake, please look with favor upon your trusty servant and grant me a ratecut.
Speaking of China:
Bloomberg:
PetroChina Co. almost tripled on its first day of trading in Shanghai, becoming the world's first company to be valued at $1 trillion, more than Exxon Mobil Corp. and General Electric Co. combined.
Citigroup Default Swaps Rise to Record on Writedowns (Update2) - Bloomberg.com
"Whew, I was worried there a bit this morning:
Crude oil erases earlier losses, trading near record high"
And gold at 810. The beat goes on, until it doesn't.
Level 3 does not necessarily indicate worthlessness. For example, equity options maturing in more than 15 years are considered level 3. Blame FASB's strict standards under FAS 157.
My suspicion: they all went into Level 3 assets INTENTIONALLY.
Why? Despite the fact that valuation is so hard that it's based "on management's best guess?" No, precisely because that situation allows "mark-to-market." That means, essentially, unauditable adjustments in valuation of $148B in assets, every quarter, to satisfy management's need to hit the number.
This is exactly what Enron did. Exactly. Exactly. Thank god our auditing firms, the SEC, the financial press, all have learned from past mistakes, so these things could never happen again.
Oil and gold only go up - just like the stock market and real estate.
I understand "too big to fail." This just seems too much like "too influential to be held responsible." Citi "won't" cut the dividend because the stock price would be affected? Every effort to date by every participant seems directed at thwarting market discovery.
I think there if a fine line between "too big to fail" and "too big to prop up anymore".
A reminder here is that Bernanke is an expert in both causes and effects related to the Great Depression. I wondered why he was fast-tracked to become the FED's chairman?
Right now I don't now if citi is going to fail or not, but I would like someone who believes it can't fail to elaborate. What specifically makes it impossible that citi could fail? Who will hurt the most? Which specific institution have a interesting in it staying afloat and which ones what to see it fall?
I think that even if it is in the interests of all the banks to get together and try to save citi, each one is going to try to contribute as little as possible, especially with that giant sucking sound in the background. I think its possible that this cartel is too scared to cooperate.
Well if these assets were marked down 80% would that put C into bankruptcy? In need of bailout?
No doc writ large
The amount of losses that financial institutions have already recognized - $20 billion
Isn't this more like 30B? There was 10 from HSBC earlier this year.
If thing get really bad for Citi, bank regulator can force Citi to merge with a rival bank. Question is who is big enough to absorb Citi?
Does the rival bank get any choice in this ? Like.. "please don't make us do this".
Different issue, same subject... Who owns large blocks of Citi stock and would be vulnerable if the stock becomes worthless (or close to that) ?
From a comment posted by "Bernard" on Roubini's blog:
Here is the Level 3 assets to equity ratio summary:
Citigroup 105%
Goldman Sachs 185%
Morgan Stanley 251%
Bear Stearns 154%
Lehman Brothers 159%
Merrill Lynch 38%
Who owns large blocks of Citi stock
A member of the Saudi royal family did own a big chunk of C. Whether he still does I cannot say.
CR, thanks for the link to C's 10-Q.
Reading it over, C- will die from arrows it takes from multiple angles:
"...The Company's U.S. Consumer Mortgage portfolio consists of both first and second mortgages. As of September 30, 2007, the first mortgage portfolio totaled approximately $155 billion, of which 84% ($131 billion) had a FICO (Fair Isaac Corporation) credit score of at least 620 at origination (wow, how high!); the other 16% ($24 billion) were originated in the FICO=90% at origination, where higher levels of delinquencies were observed during the third quarter of 2007..."
Heck, the trick here, post-mortem, will be to identify which of the multiple wounds killed the patient!
Major institutional shareholders of C:
CAPITAL RESEARCH AND MANAGEMENT COMPANY\t230,517,177\t4.63\t$11,823,226,008\t30-Jun-07
Barclays Global Investors UK Holdings Ltd\t179,123,520\t3.60\t$9,187,245,340\t30-Jun-07
STATE STREET CORPORATION\t150,346,292\t3.02\t$7,711,261,316\t30-Jun-07
AXA\t144,848,238\t2.91\t$7,429,266,127\t30-Jun-07
VANGUARD GROUP, INC. (THE)\t139,606,101\t2.81\t$7,160,396,920\t30-Jun-07
WELLINGTON MANAGEMENT COMPANY, LLP\t104,426,206\t2.10\t$5,356,020,105\t30-Jun-07
FMR CORPORATION (FIDELITY MANAGEMENT & RESEARCH CORP)\t87,306,811\t1.76\t$4,477,966,336\t30-Jun-07
MORGAN STANLEY\t69,711,306\t1.40\t$3,575,492,884\t30-Jun-07
UBS GLOBAL ASSET MANAGEMENT (AMERICAS) INC\t68,769,985\t1.38\t$3,527,212,530\t30-Jun-07
Mellon Financial Corporation\t57,947,534\t1.16\t$2,972,129,018\t30-Jun-07
MOM, Banker, anyone,
I know that when those "bears" have forcasted the demise of Citi, the knowledgable have called for reason and perspective, citing its size, capitalization, cash flow, whatever...
But what if the fundamental system of IB's has changed so much with respect to risk pricing, etc, that it's virtually imposible to remain solvent under the current method of operation.
Example: The systemic changes in the mortgage business over the last several years meant that anyone involved by definition was doomed to failure. Take Countrywide: If they were to try to operate say two years ago in a responsible way in pricing risk, and decide they would only make high rate loans (say 9%-10%) and require 20% down, this would mean they would get no business and die immediately. Or, they could continue to compete and die slowly like the other 179 lenders so far. They were forced to keep acting irrationaly to survive, a catch 22, die now or die later. Because they were well capitalized only meant the death was slower and more damaging. The game had changed. (like horseshoe makers, the large ones were no more insulated than the small ones when the car was invented, they only had more to lose and a slower death).
Why is Citi immune? If the systemic problems that killed off any and all mortgage brokers (not backed by the fed) no matter the size has in fact occurred, what if the same forces are in play with the IB's?
If, as in my Countrywide example, the problems lie outside the current strength of the individual IB, and are systemic, then any introspection of the company will tell you as much about their viability as looking at the stregth of the lenders 2 years ago. It's irrelevant. Their current value is unknowable. And if they all lose money then they all are worth zero.
If you think I don't know enough to know what I'm talking about, my response is that perhaps you know too much. You don't see the forest for the trees. If the problem lies outside the actual companies then those inside the companies won't see it....which seems to bearing itself out as CEO experts are seemingly the last to know what is happening to their industry.
They have an unmanageable accounting task in any sort of market hiccup:
They have receivables, as of 9/30/07, on $386 trillion of contracts/swaps!
(Admittedly, they have payables of $301 trillion against those).
I cannot fathom how their back office works with that sort of volume. In a panic, with volume spiking, it will take forever to sort through transactions.
"What specifically makes it impossible that citi could fail? Who will hurt the most? Which specific institution have a interesting in it staying afloat and which ones what to see it fall?"
Given C global reach, it is basically the whole world. Just think that all tranactions with C (whether C is the counter party, someone that will provide you with the loan, beinging the middle etc.) would be at C management discretion. Once any company go into BK court, the suvival of the business is the top priority and court can eject contracts and run it a pretty much the way they see fit. And the counter parties would have to wait in line as a claimants for C asset for the damage. In the mean time, all the counter parties will have to scramble for money (if money is tie up with Citi or C is supposed to provide ), to find another counter party for risk arbitrate (if C holder the counter party risk) etc. Just think about how many other parties dealing with C that would be force into bk becuase of liquidity or regulatory rules caused by delay..
A member of the Saudi royal family did own a big chunk of C. Whether he still does I cannot say.
yep...
Alwaleed declines comment on Citigroup turmoil
Alwaleed declines comment on Citigroup turmoil
| Reuters
Alwaleed controls 95 percent of Kingdom Holding, which in turn owns 3.6 percent of Citigroup's capital, according to the Saudi company's listing prospectus published in July.
=======================
is taken as the basis of the Hilbert space of market states.
Andrew Foland | Homepage | 11.05.07
I wrote up an exposition titled "Hilbert is Nuts" - actually its Filbert {/hazelnuts}( but what's a letter when we are trying to be funny - the a**hole prof, whose name I simply cannot remember graded it A- ( or something like that ).
If you are really questioning things you HAVE to look at those deep foundations of math. I'm still looking 30+ years later and its STILL a load of bollocks (Wolfram may be on to something though ) - but I have no better viewpoint - yet.
-K
Problems in the subprime mortgage sector are could "get worse before they get better," Federal Reserve Governor Randall Kroszner warned today.
He gave two reasons for the pessimistic outlook. First, "all indications are that housing activity is continuing to weaken" and house prices in general will be "sluggish for some time."
Second, mortgage delinquencies and foreclosures will probably "continue to rise for a number of quarters" because the bulk of "resets" to higher rates and payments have yet to come.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
No chit Sherlock
Common sense, but revealing once I see it in black and white; if the public panics, they are toast: they have U.S. savings and time (CD) deposits of $205B and OUS deposits of $516B.
Yep, there are multiple ways -- Level 3 write downs; reduced collections on its held mortgages; run on deposits -- for C- to die.
The problem is leverage, and it is systemic. The ability to keep assets(which themselves are highly leveraged, AND whose underlying collateral((the U.S. consumer is highly leveraged))) off balance sheet(temporary, it seems) there by INCREASING the already ridiculously under capitalized(leveraged) banks' risk of insolvency.
The entire system has been built on unbalanced, lunacy. Lunacy created by an inflationist monetary policy.
What needs to be understood is that fiat's usually obvious dependency on faith is something that has MUST have been lost in the minds of the fools who purvey such a reckless policy.
Hey everyone, tell me this. C has over 2.2 trillion in assets alone. What if those assets decrease by 10% over the next year? C market cap is less than 200 billion now. Too big to fail? Nothing is impossible with that amount of leverage. That is why what is coming will be like nothing ever seen before.
So Banker, how's it looking for CITI classifiable as BK?
Oh, they're still earning a few billion a year, so that makes it not so?
They're close enough to upside down that their bondholder attorneys should be working 24x7 to figure out how their gonna take over.
Welcome to the new Citi-Countrywide Bank. Everyone gets new red-rubber-band wristlets, whoopie!
Pennies and Michael,
I agree.
I think the IB's are losing money on all business and worse yet they don't know it.
What do you do if you find yourself in a business where all your competition is willing to lose money on every transaction? (even if they THINK they are making money.)
Answer: You chose to lose money too or stop doing business.
Just like the lenders who were forced to lose money on every deal or die, IB's are in the same position.
Oops; my mistake; their deposits AVERAGED $721B in Q3; at 9/30/07, they stood at $813B.
All against net Tier 1/2 capital of $134B.
A simple run will kill them many times over.
Got to keep up the facade, got to keep up the facade...
Uh the Chinese banking system is so stuffed full of bad loans Citigroup looks like a paragon of banking virtue in comparison.
Turbo
Good call. China is at least as Ponzi as the U.S. Talk about manipulated markets, hidden NPL's, real estate bubble, manufacturing bubble, powderkeg of social instability, etc. China is a "story", nothing more and nothing less.
Erin Burnett actually pronounced it "shittygroup" this morning
GTFO.
jg
Any idea what % are insured?
Does anyone know whether it's legally possible for Citigroup (the holding company with I think most of the investment banking exposure) to fail while Citibank (the consumer bank) gets saved somehow -- by a merger, maybe?
$134 B in Level-3 Assets?
Two questions:
1. Is this amount ex-SIVs?
2. What percentage of write-offs are against these "unobservable" assets?
I named a puppy Schroedinger back in the day.........
Never thought I would fall back on Quantum physics to deal with banking.
There is benefit in BS, the degree that is.
I agree with the China comment, however, they are in a much stronger position longer term than the U.S.
Frederick Demetrius, this is ex-SIVs. Citi isn't responsible for losses at the SIVs (at least not on paper), so they don't have to include the assets or liabilities on their balance sheet.
Best to all.
Does anyone know how much money might have to be put back onto Citi's balance sheets, i.e. how many legal contructs are out there that strict(er) accounting rules would force Citi to acknowledge. This strikes me as the place to look first when contemplating BK for Citi.
I agree with the comments about China. However, I also believe good 'ole whacky Jim Rogers. China in 2007 is like the U.S. in 1907 and the U.K. in 1807. Over the next 50 yrs If you have assets tied to their economy you will do very well. I also believe starting in 2008 until 2015 you are going to experience some serious pain no matter where you are invested.
B-, I don't see where C details what amount of the deposits are insured.
Against the $813B of deposits, they have truly liquid assets of $480B (cash, deposits, repos).
Hey, that would be a nice sized short term loan from the discount window in the case of a full-out run: $813B to pay out - $480B cash on hand = $333B loan from the discount window!
Yawnnnnn,
Sp500 still 122 points above Aug 16th , 207 low of 1371
Time for the 2 pm sucker punch in the market.
Ron Paul grassroots donation drive has just gone viral. Over 2 million so far just today. RonPaulGraphs.com - Donation Statistics & Stuff
"There are going to be many, many, many 'too big to fail' stories"
Let me speak the unspeakable. I am very concerned if USA should belong to the list; especially once the entitlement tsunami kicks in. I just can't understand how we can prevent joining the club of Brazil, Argentina & Russia in view of our unfunded liabilities.
If you're gonna call for a Citi BK, you're gonna have to show your work. Throwing a 10% writedown against an entire asset base and arguing that will cause BK is um, uncompelling shall we say.
The key BK questions are:
1) Are the core businesses producing cash? Are they producing cash insufficient to service debt? References to the 10-Q would be appreciated.
2) Is the balance sheet "re-financable," that is, is the commercial paper program sustainable? if not, why not?
3) Are the fixed costs so permanent that the company cannot reduce costs quickly enough to meet a new environement? In this business, why would that be so?
4) They have a $2.7 billion quarterly dividend that is optional. What would the financial impact of an increase in cash of $2.7 billion each quarter be?
Now, are there things to be worried about? Sure. But BK seems like an awful big stretch to me. I am happy to be educated otherwise.
I guess Citi won't be selling much going forward:
Thank you for the interest you have expressed in the Sales Liaison position with Citi Global Wealth Management. At this time we regret to inform you that the search for this position has been placed on hold.
Global Wealth Management is a dynamic organization and our staffing needs are always changing. We encourage you to explore other career opportunities within Citigroup by visiting our careers website, Careers at Citi If you are interested in applying for another position, please submit your application on-line.
We appreciate your interest in Citi Global Wealth Management and wish you success in your job search.
1) Are the core businesses producing cash? Are they producing cash insufficient to service debt? References to the 10-Q would be appreciated.
We don't know. 10-Qs are not adequate to this task.
2) Is the balance sheet "re-financable," that is, is the commercial paper program sustainable? if not, why not?
The answer is "no." Citi is too big. The CP markets are too locked up. The math clearly indicates that rolling over long term exposure at short term rates that are higher is clearly unsustainable.
Be a part of the Ron Paul rEVOLution.
Ronpaul2008.com - congressman Resources and Information.
Robert,
I agree on the difficulty with the 10-Q's. But can you provide any evidence that the company is bleeding cash at this point?
On the CP, Citi has been refinancing all through the credit market mess...just sayi
"Over the next 50 yrs If you have assets tied to their economy you will do very well."
Although there are resemebalences (sp?), China is very different than the U.S. 100 years ago. Have you not heard of all the unrest amoung the Chinese peasants? That their whole middle-class has invested their life-savings into the stock market? When their stock-market crashes and their banks crash, most of those new middle-class people will find themselves to be peasants again. And they won't be able to restart as the U.S. and the rest of the world will be starting their decade or two long recessiondepression. And believe me, they will take their frustrations out upon the government there.
Banker,
Doesn't the likelihood of Citigroup's BK depend entirely on the degree to which Citigroup is legally allowed to get financing from it's banks? The June 30 filings with FDIC and NIC indicated that Citigroup only had $30 billion of its own (non-FDIC affiliate related) capital. If the banks have only a limited ability to support Citigroup, it may not take much in write-downs to BK Citigroup.
If you understand how the holding co. - FDIC insured affiliate relationship is likely to work out, it would be great to know more.
On the CP, Citi has been refinancing all through the credit market mess...just sayin'
How can you be sure? A lot of banks have revealed that -- presumably due to backstop credit obligations -- they have been buying the CP of their conduits and SIVs. How can anyone know what was sold in the market and what looks like it was sold on the market?
Banker,
I posted this on another thread this morning and please excuse the lack of detail which you can find there.
The Balance Sheet has become suddenly bloated over the last year, incredibly so. NI fluctuates but has not kept pace with Assets. Cash flows are almost neutral. This is usually very bad for a company at an obvious inflection point.
You know better than I the things a company this size can do. There's a direct line to the Fed, White House and Justice Dept. Citi could survive with a disguised govt bailout or by drowning everything around them.
I'm no expert at reading bank financials, but I don't think much expertise is required in this case as I do not have faith in their valuations.
QID time!
"Q's. But can you provide any evidence that the company is bleeding cash?"
A $10 billion writedown, maybe?
I have a citibank credit card, and am waiting for a rebate check. If it shows up, I better cash it quickly.
does Erin give good headache?
In my post above, I meant to reference the high-level financials on Yahoo. No detail, but the basic ratios and trends are not good unless the company's in a state of high-growth.
Banker-
Good questions about evaluating the risk of bankruptcy. Since I'm one of the ones that is openly pondering the question, let me be more precise in what I'm asking. I don't believe Citi will be BK in the sense that they'll end up in bankruptcy court, delisted from the NYSE, etc. Banks don't usually go that way. Recall that no IB has ever gone bankrupt. They merely "merged", got bought out, or quietly divested their remaining assets and renamed themselves (although many of them weren't public companies).
So I guess my definition of a Citi bankruptcy would be:
1) Inability to meet capital reserve and other banking solvency regulations, forcing a fire sale of assets or other desperate means to avoid the regulators shutting it down
2) Forced merger with another bank
3) Essentially zero or negative shareholder capital
4) Loss of trust among other banks as a counterparty. Citi is a large market maker in the OTC currency markets, debt markets, and just about every other financial market one cares to name. That's based on counterparty trust. If that erodes to the point where people actively avoid trading with Citi, then that essentially means no one counts on their solvency.
Anyway, I'm not advocating a run on Citi. Unless your savings account has >$100k, you're insured regardless. And they won't be visiting a bankruptcy court anytime soon. But I guess my definition of de facto insolvency is a little broader than that. Thoughts?
I agree on the difficulty with the 10-Q's. But can you provide any evidence that the company is bleeding cash at this point?
Isn't their capital reserve balance less than 1/2 normal? Is that not an important component of "cash on hand?" I am worse than stupid as to the exact and technical wording but what I see is is impaired assets and delayed markdowns and attempts to move off balance sheet and excessive leverage and closed borrowing conduits. All pointing to liquidity shortages.
And right on schedule comes this article. Note their emphasis on Citi's counterparty credit ratings...
S&P may downgrade Citigroup's ratings; cites additional markdowns, CEO departure
November 05, 2007: 02:48 PM EST
SAN FRANCISCO, Nov. 5, 2007 (Thomson Financial delivered by Newstex) -- Standard & Poor's (NYSE:MHP) Ratings Services on Monday put Citigroup (NYSE:C) Inc.'s AA long-term counterparty credit rating on creditwatch with negative implications, citing additional markdowns at the financial-services firm and uncertainty in the wake of Chief Executive Charles Prince's resignation.
The agency said it also placed the AA+ long-term counterparty credit rating of Citibank N.A. New York, N.Y., on creditwatch negative.
'Citigroup's announcement that it would have to make $8 billion to $11 billion of additional markdowns on its CDO exposures is unwelcome news after the very weak third-quarter results,' S&P credit analyst Tanya Azarchs said in a statement.
S&P also said CEO Prince's resignation could signal a period of strategic uncertainty. If the new management were to significantly move to make the firm less diversified through asset sales or other means, it would be negative for ratings.
The agency said it plans to meet with Citigroup's management to determine its longer range prospects in terms of loan quality and reserve requirements, as well as the implications for changing strategies in its investment bank. S&P said it would also examine the firm's investment banking operation's risk management.
Katherine Hunt
Copyright Thomson Financial News Limited 2007. All rights reserved.
Robert Coté, Akalabeth?
I have a question.
If the FedGov can prevent Citi from failing. Why can't they then prevent any other bank from failing also? Just do the same games and tricks. If that's not possible, then why do so many of you think it will work for Citi?
Lune,
Several IB's have gone belly. Drexel the most recent big one.
Your definition of BK is simply braoder and different from what BK means. It is a specific term with a specific meaning. Let me adress your other possibilities:
1) Meeting Reg requirements-I assume this is an ongoing process for ALL banks and IB's right now.
2) Forced merger-I have already raised this as a possible and if things get really bad at Citi, I think this is what happens.
3) #2 happens first
4) That would immediately lead to a technical BK. This scenario is what kills financial insitutions.
My guesses anyway.
Robert Cote,
No. Cash is only a small subset of overall capital. Each can create a problem, but cash is simply cash and things you can turn into cash immediately.
Cash is only a small subset of overall capital. Each can create a problem, but cash is simply cash and things you can turn into cash immediately.
This is just like all the other "definitions" subject to interpretation. The only difference I see is scale.
Write a check for $1000 and promise with no cash to cover == go to jail.
Promise that your overdraft for $11,000,000,000 is good and you get to be head of Citibank.
I think I understand capital and reserves and such. What I also think I see is Citigroup getting a free pass.
Robert,
I don't know what to tell you. GAAP and regulatory bodies have specific definitions, you don't like'em?
GAAP and regulatory bodies have specific definitions, you don't like'em?
Oh really? And they apply equally and don't change? Good, here's my check for $11b, please transfer $10 billon to my account. I'm good for it because my lawyers say that my beanie baby collection last traded cumulatively at $14 billion in 1998. All GAAP correct.
The following table represents the carrying amounts and classification of consolidated assets that are collateral for VIE obligations, including VIEs that were consolidated prior to the implementation of FIN 46-R under existing guidance and VIEs that the Company became involved with after July 1, 2003:
In billions of dollars Sept. 30,2007
Cash................................1.7
Trading acct assets..........24.5
Investments....................27.0
Loans..............................9.5
Other assets....................4.2
Total assets
consolidated VIEs.............66.9
The following table represents the total assets of unconsolidated VIEs where the Company has significant involvement:
ABCP conduits.................73.3
SIVs................................83.1
Other vehicles.................27.0
CDOs..............................84.2
Mortgage-related.............11.9
TRUPS............................11.7
Structured finance/other.52.2
Total assets
unconsolidated VIEs........343.4
The Company's maximum exposure to loss as a result of its involvement with VIEs that are not consolidated was $141 billion and $109 billion at September 30, 2007 and December 31, 2006, respectively. For this purpose, maximum exposure is considered to be the notional amounts of credit lines, guarantees, other credit support, and liquidity facilities, the notional amounts of credit default swaps and certain total return swaps, and the amount invested where Citigroup has an ownership interest in the VIEs. This maximum amount of exposure bears no relationship to the anticipated losses on these exposures.
Maximum Exposure
In billions of dollars September 30,2007
ABCP Conduits..................69
SIVs..................................3
CDOs...............................43
Other structured fin.........26
Total..............................141
Citi' provided liquidity to the SIVs at arm's-length commercial terms totaling $10 billion of committed liquidity, $7.6 billion of which has been drawn as of October 31, 2007. Citigroup will not take actions that will require the Company to consolidate the SIVs
The following table represents the total assets of unconsolidated VIEs where the Company has significant involvement:
ABCP conduits.................73.3
SIVs................................83.1
[...]
The Company's maximum exposure to loss...
ABCP Conduits..................69
SIVs..................................3
[...]
Wow, you can really see the advantage of SIVs to conduits for Citi. Seemingly, the company's maximum exposure to SIV losses is "just" a few billion. So, why is Citi fighting so hard for these SIVs? (And I don't want to hear the unbelievable tales that it's for their "reputation"...)
All I can think is that some of these "arms-length" transactions will turn out, like Merrill, to have actually left large chunks of risk buried in Citi's books. Anyone have a better explanation?
Mr. Prince kept dancing right over the cliff. Solvency comes into question on many of the big names because of Level II and Level III holdings. I believe GS has 50% of it's assets in Level II and III. Scary seems to fit being so close to Halloween.
DCRogers,
In this context, think of reputation as the currency that allows you to trade. It is that important.
All the information one needs to make an intelligent decision on Citigroup lies within today's 10-Q. It's all there, but you need to dig.
Find it, pat yourself on the back, then position accordingly.
p.s. It ain't opaque, and I ain't fishin'.
I said:
So, why is Citi fighting so hard for these SIVs?
Banker | 11.05.07 - 6:46 pm
In this context, think of reputation as the currency that allows you to trade. It is that important.
Thanks for the insight... but if there aren't any buried (risk) bodies here, I still wonder how long Citi will fight before throwing the SIVs under the bus and focusing on its own, considerable, problems. Reputation may be queen, but cash is king.
[biting tongue trying to avoid a "prince" pun... ouch that hurts...]
In this context, think of reputation as the currency that allows you to trade. It is that important.
And that's where the cashflow comes (fees) that keeps them out of BK even if some question their solvency... if you keep making the nut every month no one questions the asset quality all that much... start having cashflow problems and the 'going concern' question gets raised... that's death.
People who have never run a business - even a small one like mine - have no idea how important on going cashflow is... it is the oxygen of business.
Dry,
Have you seen the Statement of Cash Flows? Have you seen the last 4 quarters' Balance Sheets? The rate of bloat is incredible. This is not a high-growth phase.
I didn't look at the notes or much else beyond the level one detail on Yahoo Finance, but that's not a profile of a company poised for a slowdown.
Medicine,
Good point. Many here have talked about "Off Balance Sheet...". The problem is that VIE's have a way of staying ON the Balance Sheet, even when they don't belong. It's the subsequent revaluations of the VIE's that never are recorded.
lama asked:
"Dry, have you seen the Statement of Cash Flows?"
Hmmmm??? Very warm. Maybe hot even.
DCRogers asked:
So, why is Citi fighting so hard for these SIVs?
Citigroup is not under any contractual obligation to extend liquidity to the seven ugly sisters. Ultimately, the bank could just walk away and leave investors holding the bag. As Banker informed - huge reputation risk. Further, see the ABCP conduit exposure? Full committment to extend liquidty should the conduits be frozen out of the CP markets. Further still, the kicker with the SIVs has to do with the leverage. There is a very small equity base which is leveraged about 12 - 14 times. So a small haircut of say, 2% on the assets could lead to about a 25% knock on the SIV's NAV. (Citi SIVs NAVs were recently quoted at around 73%). No way they want this on the balance sheet, and they can't punt it because then no one would buy the CP to fund the conduits. Bad, bad, very very bad.
Level 3 assets are not worthless, but it is a pretty good bet that they are worth less than carried on the balance sheet at. The Fed really should be ordering them to eliminate the dividend now and stop any share repurchase activity. Next step would be to start laying off loan officers en mass. With its reduced capital levels, the last thing they should be doing is extending more loans. There will be substantial regulatory forebarence and no C will not go under. It will be a crappy stock to own for a long time, but it will not drag down the whole system. Not sure about the forced take over idea, what bank would be big enough to do so, but not be so big that they would not breach the 10% deposit market share cap? if that could be waved, a merger between JPM and Citi could maked some sense. you would be able to shut down oh say 700 branch offices and not really lose any depositis. How many corners in NY have both a chase and a citi branch on them. This was the model for the Chemical/Manny Hanny/Chase series of bank consolidation. Worked out pretty well at the time. I would pretty much be avoiding the financial sector right now. if you need exposure (ie prospectus says you cant go naked in a sector) stick to P&C insurance names. if you need to have a bank, look at ICICI Bank (IBN $65), they should be as well insulated as anyone from US sub price and pier loan problems, a lil pricy though, and might want to wait for a lil pull back to the high $50's where there is good technical support, but very solid growth prospects. The fundimential institution is much more solid than any of the big US banks.