From the link: "Four years ago they could not imagine that they would be in this position," ...
"Now suddenly in this very short span of time...
So you have this big confused situation where there's no well-thought-out strategy at the government level."
Dammit CR! This Mortgage Pig Drinking GameĀ is getting out of hand. Of course I can name about 24,000 soon to be ex-employees who could be quoted as saying they saw this coming and happening a long time ago.
Just to keep the timing straight, the Citi story first started circulating late Friday. CNBC broke it then, and is now doing follow-up. So if you don't see a big market response, I'd guess that's why.
I almost had a heart attack when I saw this. Doug Kass, who has been almost as bearish as most of the people here for a looong time now says to buy the fiancials.
Um, the big problem is that a rate cut is now pretty much factored in, so the traders will pop it up for 20 minutes, and then we resume our regularly scheduled drop.
What I can't figure out is how so many homebuilders still have significant market equity.
Someday this war's gonna end...but judging by some everyday folks I talked to this weekend denial is still S.O.P.
If I were the Chinese senior leadership, I'd say "no", too. If they're coming to China, they need a lot of money, desparately, and now. Not a lot of other places they're likely to get it. Make Vikram come back begging a couple or three times and you'll get a better deal.
But in the end if you're the Chinese leadership you might as well use all those piled up dollars for something. They're just trying to get the most C for their money.
Personally I was very UN-surprised by the China move (or UN-move). The one thing they like to do with their reserves is buy jobs in their own country - either by public works (big damns) or via currency manipulation to support export growth. When I heard about that deal I asked myself... how does that help strengthen the dollar - Citi is a black hole and unless the equity is 'tradeable' it won't do squat, they'd be better off buying treasuries, agency or something like that.
I guess somebody in the Politburo or Central Committee of CCP agreed.
Only another $24B, that's all. How many more skeletons to be found before this mess is over. Nothing but a quasi-legal variation of money laundering conducted by the banks to circumvent regulators and reserve requirements and conceal transactions this is. Indictment investigations should be across the board, not just BS.
Doug Kass's call is interesting. The issue here is not where the stocks are headed, but what it says about psychology.
In a nutshell, Kass thinks the bad news is priced in.
OK, maybe so. But there's a dynamic at work that may prove him wrong, an important one for the real economy.
That dynamic is reflexivity. The credit markets have "crashed", financials have "crashed", retail has "crashed", but the impact on the broader market has been limited. At some point, however, we could see a feedback loop kick in: falling stocks hurt consumer and business confidence, causing the stocks to discount yet more pain in the real economy. This is what Soros called reflexivity: the idea that the markets are actors in the economy, not just observers.
So basically, the more they go down, the more they go down. This is the opposite of what Kass is saying.
Reflexivity 100%, but at some point stocks going down just becomes a recipe for a powerful confident rally back up from undervaluations. I think the Citigroup news puts the bottom in financials off for a little while, perhaps end of 2008, but SOME small cap financials are already bargains.
$24B could be the biggest writedown for C but it won't be the last. They have exposure to consumer credit all over the place. A lot of downside left in the financials. That's not to say there won't be some rallys to jumps all over.
Re: Doug Kass....he must have gotten a death threat with the condition of publishing this
probert | 01.14.08 - 12:37 pm | #
Some people don't mind losing a lot of money in the pursuit of making even more later. I think DK's call fits that model.
Financials aren't like airlines (which over history have consumed capital - and don't produce it)... financials over time make money and quite a lot of it. So if you buy a lot you will likely eventually do okay... but some of those firms won't... they will 'Countrywide' on you.
Question is when, how much and who will be making it and who won't. Unless you are comfortable with a lot of red ink for a while I wouldn't try to guess that call. However - by the time it is OBVIOUS to a bunch of internet bloggers it will be OLD NEWS to the pros and mostly priced in.
I can't afford to lose that kind of money even 'temporarily' and especially NOT NOW - kids in college, wedding age, etc.
I'd punt but that's just me & not meant as investment advice for others.
I think it's pretty sad the the Indians are the one's that will suffer due to the Chief's foolish decision making.
I got an idea, let's all gather with torches and pitchforks, and demand that Mr. Prince and The Tan Man, etc, pay all that parachute money to a sovereign fund, designed to help the peons down below.
David-I understand your point about reflexivity. However, I think we have already seen more of it than you let on. Tech is down a lot (QQQQ is at least 15 % below its high), transports have been crushed and industrials are down quite a bit. The only things steady to higher are utilities, health care and consumer staples, which always do well in recessions. Also, the IBM news hasn't been mentioned, but it is significant.
Kass is a smart cookie, and while I'm not ready to jump in, a change in his sentiment to this degree is not to be ignored. I can tell you if I were short financials, I'd be thinking hard about covering.
I think history shows that sometimes an industry downturn is followed by a protracted period of annoying ROIC, reluctant/dilutive capital raises, industry overcapacity and refusal to recognize the new realities. For example the big telecom networks post-2001, Gloal Crossing, Qwest, AT&T, Level 3, XO, Verizon, MCI/Worlcom etc', they didn't stop for a long long time... only last year has it goten really better... and now that we're headed into at least a mild recession, maybe trouble will return.
Aheadofthecurve - as a broad group, I'd say it's still too early. At some point, the viability of C, BSC and any number of medium size financials is going to be severly questioned, so I'd start compiling a list of financials you think will come out of this mess on top, think about price points your comfortable with, and wait for them to get sucked down in the vortex of selling. This sort of mess just has to end in a panic blowoff, and you'll know it when you see it, and I don't think we've seen it yet. That's how I'm playing it anyway. That being said, I do have a couple small entry positions in BAC and AIG, because those are two I see coming out on top eventually, but I won't be surprised to see them go lower first. How bad can it get? Well, at one point in 2002, the entire Japanese financial sector was valued at about the same market cap as C. Plus ca change...
To me, in the financial sector, you start off with one primary factor: management COMPETENCE and HONESTY. That's why I would never touch BAC, I think Lewis overpaid for MBNA, Fleet and now possibly CFC. There are easier picks in financials, the most simple of which is actually a "hidden financial", Berkshire Hathaway. Sure, they ain't about to become a bank, but they can play in insurance, buy whole mortgages or even parts of REMICs/CDOs. Same thing with WFC. You wanna shoo for quality because these guys are already looking at what's going on here...with conservatism.
I suspect Gasparino has been fed these numbers as a form of damage control. Citi will probably write down more than anyone first expected but less than $24bn. So everybody will be "glad" that Citi is only writing down somthing like $15bn or $18bn.
As I wrote over the weekend in a monster reply thread, if the whisper number is right, Citi's Tier I ratio would fall to 5.35%, which is below the 6% that the Fed wants for a "well reserved bank".
Prince Alaweed's infusion of up to $15b(although that would get his stake above 10%)only gets them to 6.5%, so they'll need to get another $10b to get them above 7% and have some breathing room.
China saying "thanks, but no thanks" is bad, because that's a heckuva lot of couches to be digging change out of. Any further maneuvers to raise capital will likely be bad for the stock price, because it damages the asset base or is even more dilutive.
Kass has the right idea, just the timing's wrong. Q2 looks a better window.
Any further maneuvers to raise capital will likely be bad for the stock price, because it damages the asset base or is even more dilutive.
Not quite true; they could still cut or eliminate the dividend. Although if they actually cared about all shareholders, they would have done so already.
Don't know where y'all live, but Citi has been doing a huge retail push here in New England. Branches opening everywhere. I stared in amazement as shiny new employees showed up with dotted lines already tatooed around their necks. Now I'm wondering whether half the furniture will even make it out of shrink wrap.
So much the better. We don't want all these furriners owning precious, irreplaceable US assets. So Citi will have to be nationalized. So what. Isn't Northern Rock being nationalized too? Then we can all share in the loot or whatever.
The biggest US bank unable to cover its writedowns is apparently bullish since the market is UP today. More and bigger writedowns will send the market up even more. At least that is the pattern.
China should have said, "sell us the whole bank for 10 cents on the dollar and we'll go for it." I mean when you hold the whip in your hand, you've got to have the guts to use it.
James- I think the market up is related to IBM. They were pretty bullish. The market has already accepted that the financials stink. The $ 64,000,000 question is what about the other 80 %?
IBM is considered a bellweather, at least for tech. Most everyone accepts a slowdown/recession in the US this year. The big question is can growth overseas continue, even if at a somewhat lower pace than the last few years? IBM suggests that could be happening.
I wonder if it has occurred to people in general that this mess may pave the way for some rather socialist legislation. If we have a real humdinger of a recession, I would think a majority of Americans would think some socialism would be very much in order. "Conservative" might even become a dirty word again as it used to be.
James:
agreed. there's a reason that the word "populist" has sprouted up again.
when was the last time you heard that in reference to American politics? I now hear it 10x a day at least.
it's like a pendulum... we swing more socialist, then more free market, then more socialist, then free market.
no system is perfect. when we're on one end too long the abuses start to show, so people hunger for change... after a while they realize the problems with the new system, so they hunger for change again, back where we started.
"James, I'm sorry, but what the majority of Americans think, or don't think, doesn't matter."
It does, if it stops them from buying things. Right now everything's built on that.... I know you're snarking, but the whole economics PR show this last year or two has been to keep the consumer buying.
Because when he stops, the music stops... and the lights go up... and everybody sees clearly.... and then, a year or two down the road, you might see Huey Long as the reasonable alternative.
"Banks haven't lost this much money, in relative terms, since the Great Depression, said Richard Sylla, a professor of the history of financial institutions and markets at New York University's Stern School of Business.
"U.S. banks, insurers and real-estate companies earned about $1 billion a year during the 1920s until the stock market crash of October 1929. The industry lost about $500 million in 1930, $1.7 billion in 1931, and $2 billion in 1932, Sylla said.
"Within days of being inaugurated in March 1933, President Franklin Roosevelt issued an emergency order declaring a 'bank holiday' to stem a run on deposits. About 7,000 banks, or a third of the U.S. total, failed and financial companies didn't return to profitability until 1936, Sylla said."
What do all of these billions of writedowns mean to the economy at large other than the points brought forth in this article (banks lose profitability; loans tighten; recession forwarded by lack of credit)? What major probable consequences to the economy at large may we expect from such staggering losses?
"the music stops... and the lights go up... and everybody sees clearly.... and then, a year or two down the road, you might see Huey Long as the reasonable alternative."
I'm seeing hints that the credit squeeze is hitting businesses outside of housing... some mfg & service companies I work with that have highly seasonal revenue are finding it hard to fund their off-season operations (when the stuff is made to later sell IN-season).
"According to the B/D model...citigroup actually just added 50,000 employees.
mike q | 01.14.08 - 12:11 pm | #"
Brilliant. Saved my day. I wonder when the US will cease under reporting its unemployment. For an OECD country, US has fairly few people that actually work when compared to many other countries. Many countries in Northern Europe have a way bigger proportion of their population working than is the case in the US. As Krugman writes in the below linked article, the employment situation in the US is roughly the same as in France.
BTW the reason the Japanese 'invented' Just-In-Time & super tight supplier networks WASN'T because it was some magical systems theory innovation... it was to reduce inventory so as to keep working capital at a minimum... i.e. minimize cash requirements. The reason the 'quality revolution' followed from that was you can't run that hand-to-mouth unless EVERYTHING goes as planned - including each and every part you buy fitting & working exactly as intended - no scrap, not one day late.
I think you are greatly over-estimating the extent to which slowing economic growth is likely to lead to political change. Look at Japan-15 years of very little growth and the same ruling clique that has run things since 1945 is still in place. We have an aging demographic, which mitigates against any radical change. I could see some kind of universal health care, with a mixed private/public system, because business would like to be relieved of being in the health insurance business. Some increased financial regulation, which the bamks wouldn't oppose at this point in time. More than that, don't bet on.
Forget all that stuff you learned in your civics class and hear on TV. You'll be better off.
What makes you think my ideas come from some "civics class" or from TV? I have a PhD in History from a prestige US University and two degrees from Cambridge, UK. I don't think I get my ideas from TV or a civics class. It is simply good sense to expect that there will be a strong move to regulation of the economy and government intervention in business matters. This is almost always what happens when business screws up as it did in the 1920s. The idea that the government is going to stand by and let major banks and IBs go bust is silly. If matters are not as serious as this blog suggests, then perhaps business can escape stringent government regulation. Otherwise it is sure to come.
James, the US Gov may not let the dead companies fall over, it's the sovreign wealth investors that will let the dead companies fall. After all, they have some sense of responsibility to their govenors and haven't bought as much of the American exceptionalism BS that tblinds many in the US.
Six months from now, these funds will be able to get what they want on far more advantageous terms.
Of course there is government intervention. Don't be silly. But the extent of it is less than will probably be the case if this slump turns into a searing recession.
Citicorp blew it. They offered the Chinese the wrong securities. Instead of equities, they should have offered a no-doc ARM collateralized by Taiwan. If anyone raises a stink about Citicorp's right to put Taiwan on the hook, they can hire Jennifer Wong to gin up some paperwork as China forecloses on Taiwan.
Of course there is government intervention...But the extent of it is less than will probably be the case if this slump turns into a searing recession.
Well, if I were the owner of these miserable investments, I suppose I would want even more "intervention" from the government as well. The question being, where will the money come from?
one simple question. on what will the banks earn the money from now on? the mortgage industry is generating huge losses, the credit cards are as well. the car leasings are just a slightly better in term of deliquence but there wont be any big expansion in this field. MEW is over, IPOs are over, takeovers are over. why are the chinese going to buy stakes in companies that have no way to replace their lost earnings?
on what are the banks going to get earnings? ou i know a fee here a fee there xD but i doubt very much it will replace the 24b citi is writing right now
on another note. i just switched from my 50%stock/50%bonds pension fond to the most conservative one 75%bonds/25% stocks. theres not more conservative fond in my pension fond and the bond portfolio has a lot of company bonds from BBB->AAA. well time will show.
my new bank has a funny banking system. on my 12 month CD i found out that the year has 360 days and so i get interest for 360 days but ofcourse my money is going to be locked for 365 days. ive been studying the state regulations and they clearly say the bank should give me interest for 365 days, well we will see. i think i should ask them whether this "feature" of 360/365 interest is also available for the debt acounts and if yeas i will recomend them to launch an advertisement campaign under motto "we charge you interest that is even lower than the interest you have the contract"
The issue is not whether the government will become involved in business, but which government.
I cannot forget the photograph of the President of Indonesia signing away his country's sovereignty and his countrymen's birthright while a Frenchman crossed his arms and stared down at him.
People in Asia and Latin America haven't forgotten their currency crises and the way we exploited the opportunity and their temporary weakness.
There is a political dimension in the SWF's strategy that is not so transparent. Unlike the Japan of the past, China and Russia have grandiose ambitions, and they surely want to see the US taking some damaging body blows.
"Within days of being inaugurated in March 1933, President Franklin Roosevelt issued an emergency order declaring a 'bank holiday' to stem a run on deposits. About 7,000 banks, or a third of the U.S. total, failed and financial companies didn't return to profitability until 1936, Sylla said."
OT trivia..
The FDIC's search engine tells me that there are 4,515 Active bank certificates that date from 1934/01/01. That many banks (quite a few of them small ones) are still around and kicking.
Read James Fallows in the current Atlantic for a good overview of how China manages its dollar surpluses.
To me it is quite likely that the Chinese govt will use its financial power in ways that are not strictly financial in the years or decades to come.
Mao starved his own people to gather "surplus" cash and grain that he exported to buy influence in the third world and the communist bloc.
Today, the Chinese government is using its dollar surpluses in a similar way, increasing influence over our economy while keeping their own national economy on comparatively meager financial rations.
The financials are low except for the fact that the 'level 3' liabilities (or whatever experts call them) outnumber the assets of many of these companies, meaning they could still pull a Countrywide, and go to $5 share. In the larger picture, also, this thing is at about the 2nd inning, so its too early to buy when
lower prices are on the horizon. Both
factually and psychologically, we are not yet at a screaming panic. The time to buy in 2002 was after two years of downsliding. This crisis is much lager than that one, without Greenspan's bailout. This one's a doozy, so no, its not time to buy.
China says no to Citi. Thats funny. What do you think that will do to psychology? We've only just begun the pain.
The financial stocks, if they do have a rally, will be short and limited. The amount of dilution taking place must be kept in mind when venturing to the "worst is over" crowd. By the way, the worst is not over. It hasn't even started.
Food prices are likely to double from him, as feed and biofuel demand outstrip record planting. Futures prices must go higher to incite even more planting. On the energy side, we have hit peak supply. Together with the fact that most of the developing nations fix the price of gasoline and it is fair to assume it will take U.S demand destruction to bring the global demand equation into negative balance. Hence, without a severe recession, U.S oil prices should continue to stay around $90/barrel. SO as incomes stagnate, unemployment rises, we will have to deal with rising energy and food costs. And how can that be bullish for the consumer and its ability to service mortgages, credit cards, or to contribute to overall retail sales.
The game is over. We are at the top of the cycle. We are entering a secular decline in the U.S made worse by peak oil and China's-diet changing habits ill effect on global food prices.
And with this backdrop, why anyone would buy financial as they dilute existing shareholders is beyond me.
China is still a pretty weak country that can barely maintain stability for its own population. Citi was hoping they'd be suckers, that's all. I don't see why we have to find a enemy at every corner. I remember growing up in 80's , when everyone told me how superior Japan was. Then their bubble exploded. And India has a lower per capita GDP then Bolivia.
UBS admits that it still cannot quantify its exposure to sub-prime crisis... The Mortgage Lender Implode-O-Meter News Pick-ups: UBS admits that it still cannot quantify its exposure to sub-prime crisis
Hey, the bottom, maybe, is when they CAN quantify it
"Tomorrow should be interesting!"
no one could have expected....
"Tomorrow should be interesting!"
What is going on tomorrow?
I think Citi reports "earnings" tomorrow
Note that every revision of losses is upwards. Has anyone tried to add up the all losses into a single MJJ (Mary, Joseph, and Jesus) figure?
FDIC Notice of Proposed Rulemaking:
Processing Deposit Accounts in a Bank Failure: Modernizing Large Bank Insurance Determinations
FDIC: FIL-2-2008: Notice of Proposed Rulemaking
Citigroup announces tomorrow AM. Duh.
From the link:
"Four years ago they could not imagine that they would be in this position," ...
"Now suddenly in this very short span of time...
So you have this big confused situation where there's no well-thought-out strategy at the government level."
Dammit CR! This Mortgage Pig Drinking GameĀ is getting out of hand. Of course I can name about 24,000 soon to be ex-employees who could be quoted as saying they saw this coming and happening a long time ago.
"Note that every revision of losses is upwards. Has anyone tried to add up the all losses into a single MJJ (Mary, Joseph, and Jesus) figure?"
MATT - hey...GM did...does that count!?
RE: MJJ
Of course GM's 39bn wasn't really 39bn...or was it?
According to the B/D model...citigroup actually just added 50,000 employees.
hmmm, perhaps the Chinese discovered what happens to equity in bankruptcy
WSJ's most important article today IMO:
Trading in Deal Stocks Triggers Look at Banks Insider Trading / Study shows pattern of buying by Advisers
Trading in Deal Stocks Triggers Look at Banks - WSJ.com
Tomorrow we get Citi announcing, plus some juicy stats in the morning: retail sales, retail minus cars, ppi, core ppi and inventories. A fun day.
"People familiar with the situation say China's senior leadership decided against backing the investment plan"
Let them eat Dim Sum.
FT - Talk of emergency rate cut hits dollar
FT.com / UK - Dollar hit by talk of early US rate cut
that's a lot of jobs...
Total tally would be fun to see. Also, as a fraction of total market cap of banking sector, and compared to other banking crises like S&L, Japan, etc.
According to the B/D model...citigroup actually just added 50,000 employees.
mike q | 01.14.08 - 12:11 pm | #
Absolutely - it represents the birth of 24,000 'new business start ups'.
Just to keep the timing straight, the Citi story first started circulating late Friday. CNBC broke it then, and is now doing follow-up. So if you don't see a big market response, I'd guess that's why.
I almost had a heart attack when I saw this. Doug Kass, who has been almost as bearish as most of the people here for a looong time now says to buy the fiancials.
Kass Katch: Buy the Financials. Yes, Buy | Page 4 of 4 | Financial Advisor Update | Financial Articles & Investing News | TheStreet.com
Any thoughts?
Aheadofthecurve, everybody has a bad forecasting day once in a while. Ignore it.
Um, the big problem is that a rate cut is now pretty much factored in, so the traders will pop it up for 20 minutes, and then we resume our regularly scheduled drop.
What I can't figure out is how so many homebuilders still have significant market equity.
Someday this war's gonna end...but judging by some everyday folks I talked to this weekend denial is still S.O.P.
If I were the Chinese senior leadership, I'd say "no", too. If they're coming to China, they need a lot of money, desparately, and now. Not a lot of other places they're likely to get it. Make Vikram come back begging a couple or three times and you'll get a better deal.
But in the end if you're the Chinese leadership you might as well use all those piled up dollars for something. They're just trying to get the most C for their money.
Bah, who cares? Don't you know that its all priced already?
Hopefully the "drug bubble" will pop too...
- NY Times
In a nutshell, it's been discovered that Zetia -- about 70% of Schering Plough's earnings -- is completely useless.
Personally I was very UN-surprised by the China move (or UN-move). The one thing they like to do with their reserves is buy jobs in their own country - either by public works (big damns) or via currency manipulation to support export growth. When I heard about that deal I asked myself... how does that help strengthen the dollar - Citi is a black hole and unless the equity is 'tradeable' it won't do squat, they'd be better off buying treasuries, agency or something like that.
I guess somebody in the Politburo or Central Committee of CCP agreed.
Only another $24B, that's all. How many more skeletons to be found before this mess is over. Nothing but a quasi-legal variation of money laundering conducted by the banks to circumvent regulators and reserve requirements and conceal transactions this is. Indictment investigations should be across the board, not just BS.
Any thoughts?
Aheadofthecurve | 01.14.08 - 12:23 pm | #
Someday that call will be right. Probably not today.
I'm with dryfly- waaaaaay too much damage to go.
gotta go- some RYL is available to short.
Someday this war's gonna end...
dryfly-Almost any call will be right given enough time.
dryfly-Almost any call will be right given enough time.
Aheadofthecurve | 01.14.08 - 12:36 pm | #
Ahhh you uncovered my snark...
Re: Citigroup....wow...
Re: Doug Kass....he must have gotten a death threat with the condition of publishing this
Ahead of the Curve,
Doug Kass's call is interesting. The issue here is not where the stocks are headed, but what it says about psychology.
In a nutshell, Kass thinks the bad news is priced in.
OK, maybe so. But there's a dynamic at work that may prove him wrong, an important one for the real economy.
That dynamic is reflexivity. The credit markets have "crashed", financials have "crashed", retail has "crashed", but the impact on the broader market has been limited. At some point, however, we could see a feedback loop kick in: falling stocks hurt consumer and business confidence, causing the stocks to discount yet more pain in the real economy. This is what Soros called reflexivity: the idea that the markets are actors in the economy, not just observers.
So basically, the more they go down, the more they go down. This is the opposite of what Kass is saying.
I'm not ready to follow him down that road yet. His general point, that you don't make money buying when the news is great, is valid.
BTW, Allen, I don't think even Kass has the balls to recommend HBs
can I just say !@#!@ all these executives?!?!? Are they getting laid off???? of course not. we need guillotines.
David Pearson,
Reflexivity 100%, but at some point stocks going down just becomes a recipe for a powerful confident rally back up from undervaluations. I think the Citigroup news puts the bottom in financials off for a little while, perhaps end of 2008, but SOME small cap financials are already bargains.
$24B could be the biggest writedown for C but it won't be the last. They have exposure to consumer credit all over the place. A lot of downside left in the financials. That's not to say there won't be some rallys to jumps all over.
I think BAC is gonna get kaboomed on credit cards
Re: Doug Kass....he must have gotten a death threat with the condition of publishing this
probert | 01.14.08 - 12:37 pm | #
Some people don't mind losing a lot of money in the pursuit of making even more later. I think DK's call fits that model.
Financials aren't like airlines (which over history have consumed capital - and don't produce it)... financials over time make money and quite a lot of it. So if you buy a lot you will likely eventually do okay... but some of those firms won't... they will 'Countrywide' on you.
Question is when, how much and who will be making it and who won't. Unless you are comfortable with a lot of red ink for a while I wouldn't try to guess that call. However - by the time it is OBVIOUS to a bunch of internet bloggers it will be OLD NEWS to the pros and mostly priced in.
I can't afford to lose that kind of money even 'temporarily' and especially NOT NOW - kids in college, wedding age, etc.
I'd punt but that's just me & not meant as investment advice for others.
China to Citibank 'Good luck finding another Piggy Bank'...come back and grovel after tomorrow's bad news hits...
I think it's pretty sad the the Indians are the one's that will suffer due to the Chief's foolish decision making.
I got an idea, let's all gather with torches and pitchforks, and demand that Mr. Prince and The Tan Man, etc, pay all that parachute money to a sovereign fund, designed to help the peons down below.
Sovreign wealth funds are not going to be the patsy to prop up dead companies through money injections.
It will get increasingly harder to find the benefactor who will not insist in wholesale restructurings.
Dead companies will be allowed to fall over. It'll be cheaper to start anew.
Mr. Kass should be called "Ahead of the curve", not you. He's so far ahead of the curve, he's off the road!!
David-I understand your point about reflexivity. However, I think we have already seen more of it than you let on. Tech is down a lot (QQQQ is at least 15 % below its high), transports have been crushed and industrials are down quite a bit. The only things steady to higher are utilities, health care and consumer staples, which always do well in recessions. Also, the IBM news hasn't been mentioned, but it is significant.
Kass is a smart cookie, and while I'm not ready to jump in, a change in his sentiment to this degree is not to be ignored. I can tell you if I were short financials, I'd be thinking hard about covering.
dryfly,
I think history shows that sometimes an industry downturn is followed by a protracted period of annoying ROIC, reluctant/dilutive capital raises, industry overcapacity and refusal to recognize the new realities. For example the big telecom networks post-2001, Gloal Crossing, Qwest, AT&T, Level 3, XO, Verizon, MCI/Worlcom etc', they didn't stop for a long long time... only last year has it goten really better... and now that we're headed into at least a mild recession, maybe trouble will return.
Aheadofthecurve - as a broad group, I'd say it's still too early. At some point, the viability of C, BSC and any number of medium size financials is going to be severly questioned, so I'd start compiling a list of financials you think will come out of this mess on top, think about price points your comfortable with, and wait for them to get sucked down in the vortex of selling. This sort of mess just has to end in a panic blowoff, and you'll know it when you see it, and I don't think we've seen it yet. That's how I'm playing it anyway. That being said, I do have a couple small entry positions in BAC and AIG, because those are two I see coming out on top eventually, but I won't be surprised to see them go lower first. How bad can it get? Well, at one point in 2002, the entire Japanese financial sector was valued at about the same market cap as C. Plus ca change...
To me, in the financial sector, you start off with one primary factor: management COMPETENCE and HONESTY. That's why I would never touch BAC, I think Lewis overpaid for MBNA, Fleet and now possibly CFC. There are easier picks in financials, the most simple of which is actually a "hidden financial", Berkshire Hathaway. Sure, they ain't about to become a bank, but they can play in insurance, buy whole mortgages or even parts of REMICs/CDOs. Same thing with WFC. You wanna shoo for quality because these guys are already looking at what's going on here...with conservatism.
I suspect Gasparino has been fed these numbers as a form of damage control. Citi will probably write down more than anyone first expected but less than $24bn. So everybody will be "glad" that Citi is only writing down somthing like $15bn or $18bn.
So what does C do now. Bump up the public offering by another $9B or go try and find some other dumb shmuck SWF to pony up...
As I wrote over the weekend in a monster reply thread, if the whisper number is right, Citi's Tier I ratio would fall to 5.35%, which is below the 6% that the Fed wants for a "well reserved bank".
Prince Alaweed's infusion of up to $15b(although that would get his stake above 10%)only gets them to 6.5%, so they'll need to get another $10b to get them above 7% and have some breathing room.
China saying "thanks, but no thanks" is bad, because that's a heckuva lot of couches to be digging change out of. Any further maneuvers to raise capital will likely be bad for the stock price, because it damages the asset base or is even more dilutive.
Kass has the right idea, just the timing's wrong. Q2 looks a better window.
Alec --
Any further maneuvers to raise capital will likely be bad for the stock price, because it damages the asset base or is even more dilutive.
Not quite true; they could still cut or eliminate the dividend. Although if they actually cared about all shareholders, they would have done so already.
Don't know where y'all live, but Citi has been doing a huge retail push here in New England. Branches opening everywhere. I stared in amazement as shiny new employees showed up with dotted lines already tatooed around their necks. Now I'm wondering whether half the furniture will even make it out of shrink wrap.
So much the better. We don't want all these furriners owning precious, irreplaceable US assets. So Citi will have to be nationalized. So what. Isn't Northern Rock being nationalized too? Then we can all share in the loot or whatever.
Doug Kass says financials "could be on the mend."
Sorry, but Conjure and I regard that as bullshit. It's a hunch, and that's all.
Sweet dreams, Doug.
Not to mention other SWFs will be openly wondering why China said no thanks.
The biggest US bank unable to cover its writedowns is apparently bullish since the market is UP today. More and bigger writedowns will send the market up even more. At least that is the pattern.
China should have said, "sell us the whole bank for 10 cents on the dollar and we'll go for it." I mean when you hold the whip in your hand, you've got to have the guts to use it.
James- I think the market up is related to IBM. They were pretty bullish. The market has already accepted that the financials stink. The $ 64,000,000 question is what about the other 80 %?
In fact C is up a wee bit. I guess being told you are a bad investment makes bullfools salivate with desire.
Well why does the whole market go up if the good news is limited to IBM? IBM could go up; why does the rest have to follow?
Dead companies will be allowed to fall over. It'll be cheaper to start anew.
Don't think so, at least not for the real biggies. Last resort is nationalization. As in the UK.
Yeah, right. Financials are on the mend.
CDO DEFAULTS, LIQUIDATIONS RISING
UPDATE1-CDO defaults, liquidations rising -Morgan Stanley
| Reuters
Well why does the whole market go up if the good news is limited to IBM? IBM could go up; why does the rest have to follow?
Don't ask for logic from the market, especially when there are fees to be skimmed from the churn.
IBM is considered a bellweather, at least for tech. Most everyone accepts a slowdown/recession in the US this year. The big question is can growth overseas continue, even if at a somewhat lower pace than the last few years? IBM suggests that could be happening.
"Well why does the whole market go up if the good news is limited to IBM? IBM could go up; why does the rest have to follow?"
Because it's the only game in town.
Or, would you rather come over to my place and bet on which raindrop will make it to the bottom of the window first?
Greed and avarice, baby. It's all about greed and avarice.
"Or, would you rather come over to my place and bet on which raindrop will make it to the bottom of the window first?"
Actually mp, that could be fun, given the right pharmaceutical enhancers...
Shinies and ponies - booyah!
I wonder if it has occurred to people in general that this mess may pave the way for some rather socialist legislation. If we have a real humdinger of a recession, I would think a majority of Americans would think some socialism would be very much in order. "Conservative" might even become a dirty word again as it used to be.
James:
agreed. there's a reason that the word "populist" has sprouted up again.
when was the last time you heard that in reference to American politics? I now hear it 10x a day at least.
it's like a pendulum... we swing more socialist, then more free market, then more socialist, then free market.
no system is perfect. when we're on one end too long the abuses start to show, so people hunger for change... after a while they realize the problems with the new system, so they hunger for change again, back where we started.
James, I'm sorry, but what the majority of Americans think, or don't think, doesn't matter.
Forget all that stuff you learned in your civics class and hear on TV. You'll be better off.
OT
Wow! Conjure just thought of an idea worthy of an IPO: WEIGHTED BEER COZIES.
All of those health conscious 'lite' beer drinkers could drink and exercise at the same time.
We could put America back to work again.
Booyah!
tech is the new housing. Bubble back to tech....
Actually though if we don't start investing into tech and science and EDUCATION, we're pretty much screwed as a country.
"James, I'm sorry, but what the majority of Americans think, or don't think, doesn't matter."
It does, if it stops them from buying things. Right now everything's built on that.... I know you're snarking, but the whole economics PR show this last year or two has been to keep the consumer buying.
Because when he stops, the music stops... and the lights go up... and everybody sees clearly.... and then, a year or two down the road, you might see Huey Long as the reasonable alternative.
kass has blown it.
financials will not bottom until the collateral underlying their loans and derivatives stops deteriorating.
that collateral is housing.
housing downturn is still ACCELERATING.
Kass is an early vulture and will be immolated like the financial bulls.
Here's a good overview of bank losses:
Wall Street's $35 Billion Writedown Squeezes Profits (Update1) - Bloomberg.com
"Banks haven't lost this much money, in relative terms, since the Great Depression, said Richard Sylla, a professor of the history of financial institutions and markets at New York University's Stern School of Business.
"U.S. banks, insurers and real-estate companies earned about $1 billion a year during the 1920s until the stock market crash of October 1929. The industry lost about $500 million in 1930, $1.7 billion in 1931, and $2 billion in 1932, Sylla said.
"Within days of being inaugurated in March 1933, President Franklin Roosevelt issued an emergency order declaring a 'bank holiday' to stem a run on deposits. About 7,000 banks, or a third of the U.S. total, failed and financial companies didn't return to profitability until 1936, Sylla said."
What do all of these billions of writedowns mean to the economy at large other than the points brought forth in this article (banks lose profitability; loans tighten; recession forwarded by lack of credit)? What major probable consequences to the economy at large may we expect from such staggering losses?
"the music stops... and the lights go up... and everybody sees clearly.... and then, a year or two down the road, you might see Huey Long as the reasonable alternative."
Huey Long was assassinated.
that collateral is housing.
I'm seeing hints that the credit squeeze is hitting businesses outside of housing... some mfg & service companies I work with that have highly seasonal revenue are finding it hard to fund their off-season operations (when the stuff is made to later sell IN-season).
Eff'ing commercial paper.
Financials have just begun to have fun.
"According to the B/D model...citigroup actually just added 50,000 employees.
mike q | 01.14.08 - 12:11 pm | #"
Brilliant. Saved my day. I wonder when the US will cease under reporting its unemployment. For an OECD country, US has fairly few people that actually work when compared to many other countries. Many countries in Northern Europe have a way bigger proportion of their population working than is the case in the US. As Krugman writes in the below linked article, the employment situation in the US is roughly the same as in France.
Another jobs picture — Europe vs. US (updated) - Paul Krugman Blog - NYTimes.com
BTW the reason the Japanese 'invented' Just-In-Time & super tight supplier networks WASN'T because it was some magical systems theory innovation... it was to reduce inventory so as to keep working capital at a minimum... i.e. minimize cash requirements. The reason the 'quality revolution' followed from that was you can't run that hand-to-mouth unless EVERYTHING goes as planned - including each and every part you buy fitting & working exactly as intended - no scrap, not one day late.
Try doing THAT from a sweat shop in Chongqing.
mp,
Yes he was, but Hitler, Mao and Stalin were not. Mussolini when it was all over.
Gotta survive if we Pinochet.
Someday this war's gonna end...
I think you are greatly over-estimating the extent to which slowing economic growth is likely to lead to political change. Look at Japan-15 years of very little growth and the same ruling clique that has run things since 1945 is still in place. We have an aging demographic, which mitigates against any radical change. I could see some kind of universal health care, with a mixed private/public system, because business would like to be relieved of being in the health insurance business. Some increased financial regulation, which the bamks wouldn't oppose at this point in time. More than that, don't bet on.
Re: Not to mention other SWFs will be openly wondering why China said no thanks.
Stuart | 01.14.08 - 1:15 pm | #
SWF = Single White Female????
This site NEEDS a glossary!!!!!
Forget all that stuff you learned in your civics class and hear on TV. You'll be better off.
What makes you think my ideas come from some "civics class" or from TV? I have a PhD in History from a prestige US University and two degrees from Cambridge, UK. I don't think I get my ideas from TV or a civics class. It is simply good sense to expect that there will be a strong move to regulation of the economy and government intervention in business matters. This is almost always what happens when business screws up as it did in the 1920s. The idea that the government is going to stand by and let major banks and IBs go bust is silly. If matters are not as serious as this blog suggests, then perhaps business can escape stringent government regulation. Otherwise it is sure to come.
martin,
SWF - sovereign wealth fund
But i like the way your mind works.....
James, the US Gov may not let the dead companies fall over, it's the sovreign wealth investors that will let the dead companies fall. After all, they have some sense of responsibility to their govenors and haven't bought as much of the American exceptionalism BS that tblinds many in the US.
Six months from now, these funds will be able to get what they want on far more advantageous terms.
"A little less laissez-faire"
FT.com / Comment / Opinion - Why America needs a little less laissez-faire
Neal: NO, if the SWFs don't rescue the companies the US government will.
James,
It sounds like you don't believe that there is government intervention in business in the U.S.
James, it wasn't my intent to insult you.
I'm saying that, regardless of what the American people want, the situation has now degenerated to the point that their wishes do not matter.
They will be paid lip service, and that is all.
Re:martin,
SWF - sovereign wealth fund
But i like the way your mind works.....
r0m30 | 01.14.08 - 2:44 pm | #
Sure it doesn't stand for "Silly Wabbit Fund"?
I still say, this site has a severe case of acronymitis, and indubitably needs a glossary for finance-knowledge limited folks like me.
Of course there is government intervention. Don't be silly. But the extent of it is less than will probably be the case if this slump turns into a searing recession.
Citicorp blew it. They offered the Chinese the wrong securities. Instead of equities, they should have offered a no-doc ARM collateralized by Taiwan. If anyone raises a stink about Citicorp's right to put Taiwan on the hook, they can hire Jennifer Wong to gin up some paperwork as China forecloses on Taiwan.
Of course there is government intervention...But the extent of it is less than will probably be the case if this slump turns into a searing recession.
Well, if I were the owner of these miserable investments, I suppose I would want even more "intervention" from the government as well. The question being, where will the money come from?
mp and most especially conjure,
the "people" rarely get what they want but mobs often do.
"the "people" rarely get what they want but mobs often do."
Conjure says, "Squeezed, there's a new 'sheriff' in town. We have the technology, so let them eat cake."
Deatils of US microwave-weapon tests revealed
one simple question. on what will the banks earn the money from now on? the mortgage industry is generating huge losses, the credit cards are as well. the car leasings are just a slightly better in term of deliquence but there wont be any big expansion in this field. MEW is over, IPOs are over, takeovers are over. why are the chinese going to buy stakes in companies that have no way to replace their lost earnings?
on what are the banks going to get earnings? ou i know a fee here a fee there xD but i doubt very much it will replace the 24b citi is writing right now
on another note. i just switched from my 50%stock/50%bonds pension fond to the most conservative one 75%bonds/25% stocks. theres not more conservative fond in my pension fond
and the bond portfolio has a lot of company bonds from BBB->AAA. well time will show.
my new bank has a funny banking system. on my 12 month CD i found out that the year has 360 days and so i get interest for 360 days but ofcourse my money is going to be locked for 365 days. ive been studying the state regulations and they clearly say the bank should give me interest for 365 days, well we will see. i think i should ask them whether this "feature" of 360/365 interest is also available for the debt acounts and if yeas i will recomend them to launch an advertisement campaign under motto "we charge you interest that is even lower than the interest you have the contract"
And here I was, thinking that SWF was Single White Female. Sheesh.
Who coodanode?
James:
The issue is not whether the government will become involved in business, but which government.
I cannot forget the photograph of the President of Indonesia signing away his country's sovereignty and his countrymen's birthright while a Frenchman crossed his arms and stared down at him.
People in Asia and Latin America haven't forgotten their currency crises and the way we exploited the opportunity and their temporary weakness.
Payback could be a bitch.
There is a political dimension in the SWF's strategy that is not so transparent. Unlike the Japan of the past, China and Russia have grandiose ambitions, and they surely want to see the US taking some damaging body blows.
"Within days of being inaugurated in March 1933, President Franklin Roosevelt issued an emergency order declaring a 'bank holiday' to stem a run on deposits. About 7,000 banks, or a third of the U.S. total, failed and financial companies didn't return to profitability until 1936, Sylla said."
OT trivia..
The FDIC's search engine tells me that there are 4,515 Active bank certificates that date from 1934/01/01. That many banks (quite a few of them small ones) are still around and kicking.
Read James Fallows in the current Atlantic for a good overview of how China manages its dollar surpluses.
To me it is quite likely that the Chinese govt will use its financial power in ways that are not strictly financial in the years or decades to come.
Mao starved his own people to gather "surplus" cash and grain that he exported to buy influence in the third world and the communist bloc.
Today, the Chinese government is using its dollar surpluses in a similar way, increasing influence over our economy while keeping their own national economy on comparatively meager financial rations.
A Great Quote?
I remember some time ago some guy in England said:
" For a country that produces almost nothing we are sure doing well "
John Stark - thanks for the link...
John Stark - thanks for the link...
Er the 'lead' - I got the link...
The financials are low except for the fact that the 'level 3' liabilities (or whatever experts call them) outnumber the assets of many of these companies, meaning they could still pull a Countrywide, and go to $5 share. In the larger picture, also, this thing is at about the 2nd inning, so its too early to buy when
lower prices are on the horizon. Both
factually and psychologically, we are not yet at a screaming panic. The time to buy in 2002 was after two years of downsliding. This crisis is much lager than that one, without Greenspan's bailout. This one's a doozy, so no, its not time to buy.
China says no to Citi. Thats funny. What do you think that will do to psychology? We've only just begun the pain.
The financial stocks, if they do have a rally, will be short and limited. The amount of dilution taking place must be kept in mind when venturing to the "worst is over" crowd. By the way, the worst is not over. It hasn't even started.
Food prices are likely to double from him, as feed and biofuel demand outstrip record planting. Futures prices must go higher to incite even more planting. On the energy side, we have hit peak supply. Together with the fact that most of the developing nations fix the price of gasoline and it is fair to assume it will take U.S demand destruction to bring the global demand equation into negative balance. Hence, without a severe recession, U.S oil prices should continue to stay around $90/barrel. SO as incomes stagnate, unemployment rises, we will have to deal with rising energy and food costs. And how can that be bullish for the consumer and its ability to service mortgages, credit cards, or to contribute to overall retail sales.
The game is over. We are at the top of the cycle. We are entering a secular decline in the U.S made worse by peak oil and China's-diet changing habits ill effect on global food prices.
And with this backdrop, why anyone would buy financial as they dilute existing shareholders is beyond me.
China is still a pretty weak country that can barely maintain stability for its own population. Citi was hoping they'd be suckers, that's all. I don't see why we have to find a enemy at every corner. I remember growing up in 80's , when everyone told me how superior Japan was. Then their bubble exploded. And India has a lower per capita GDP then Bolivia.