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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Fri Nov 21, 2008 8:58 am Post subject: Citigroup is toast. |
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Either Citi or BofA was going to tank. Maybe both.
Pop goes Citi:
http://clusterstock.alleyinsider.com/2008/11/get-ready-for-another-rescue-weekend-citi-c-shares-are-toast
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Let's get real about this. There is no way that Citigroup will be allowed to go bankrupt.The government is about to step in to "rescue" the mega-bank.
Does this mean that the panic of Citi shareholders is irrational? Of course not. If the FDIC takes over the bank, there will be nothing left for Citi's shareholders. Equity will be wiped out. If the Treasury takes over, it will likely pull an AIG. That means shareholders will be all but wiped out, left with a small residual piece of the equity that will trade lightly and be worth less than half of what they were trading at before the "rescue."
Is Citigroup's market cap rational? You betcha!
Tangible assets, excluding goodwill or intangibles, are 55 times the bank's tangible equity. Here's how the Wall Street Journal's David Reilly explained things:
Tangible assets rise to nearly 59 times tangible equity if Citi has to bring about $120 billion in credit-card assets back onto its books in 2010, as is likely. Citi also may have to consolidate some of the roughly $670 billion in mortgage assets currently held by off-balance-sheet vehicles.
If the bank had to consolidate just 20% of these mortgage assets, tangible assets would rise to about 63 times tangible equity. Citigroup thinks it is "highly unlikely" it will have to bring back on book much of these mortgage assets. Even so, Citi needs to take more radical action to reduce its leverage. The job cuts are simply a step in the right direction.
Translation: there is no residual value left for shareholders if Citi goes down. The bank continues to operate simply because it still has liquidity and thanks to the Federal Reserve and the Treasury Department it probably cannot run out of liquidity.
Let's just take one little slice of Citi's problems. Citi has $16.9 billion of commercial real estate mortgages and mortgage backed securities sitting on its trading book. There are marked at 86 cents on the dollar. Do you believe that CMBS are going to hold at that level? Neither do we. The bank�s exposure represents about 17% of tangible equity, according to Sandler O�Neill. That far outstrips JP Morgan Chase and Bank of America, each of whom has reduced their exposure to single digits.
Credit default swaps are soaring. Right now they are priced at $425,000 to protect $10 million of debt against default for five years. For reference, Bear Stearns' CDS were priced at $730,000 on the Thursday before the Fed stepped in. But that was before we knew the government would consistently bail out creditors and counterparties.
By the way, we wouldn't be surprised to see Citi shares bounce at the end of the day. Short sellers are going to want to cover their positions going into a weekend of uncertainty. |
How many tens of billions will be thrown at Citi this weekend or next? |
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Milwaukiedave
Joined: 02 Oct 2004
Location: Goseong
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| Posted: Fri Nov 21, 2008 8:14 pm Post subject: |
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I heard the same as well. It seems that we are stuck in neutral for two months and very little is going to be done to actually improve the economy.
The only encouraging news is that Bush signed a bill extending unemployment benefits. The flip side of that is that if there are no jobs, then that won't help in the long run. |
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Bigfeet
Joined: 29 May 2008
Location: Grrrrr.....
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| Posted: Sat Nov 22, 2008 11:36 pm Post subject: |
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| Just get it over with and nationalize all the banks. |
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tefain
Joined: 19 Sep 2007
Location: Not too far out there
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| Posted: Sun Nov 23, 2008 2:37 pm Post subject: |
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| I wonder which K-bank will take over all the ones Citi has here if they do go under. |
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T-J
Joined: 10 Oct 2008
Location: Seoul EunpyungGu Yeonsinnae
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| Posted: Sun Nov 23, 2008 6:57 pm Post subject: |
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Got three offers in three days for 3.1% six month CD offers from Citi.
Meh, think I'll pass.
They do hold my mortgage back in the states, wonder what is going to become of that. I actually enjoyed their service. Very accessible on line and all that. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Nov 24, 2008 6:58 am Post subject: |
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| Looks like Citi is being bailed out too. And the government is going to pay inflated prices for depreciating assets. This is so absurd. |
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Join Me
Joined: 14 Jan 2008
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| Posted: Mon Nov 24, 2008 7:07 am Post subject: |
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I was watching some analyst on the news today and he said if the government wouldn't have bailed out Citi Group they probably would have collapsed today (Monday) and this could have led to a run on the banks for cash. They have over 300,000 employees worldwide and hold millions of global and personal accounts.
While I feel the American auto industry could be allowed to collapse, I think there are some industries such as banking that are just to important to allow to collapse. In five years Citi Group will be making money hand over fist again and the bailout will be justified. Maybe using taxpayer dollars is not the right solution but it really seems like the only solution available (besides a global depression) at the moment. I personally would rather turn some of my tax dollars over to bail out segments of corporate America than have to live through a depression, especially a global one. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Nov 24, 2008 7:22 am Post subject: |
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| Join Me wrote: |
I was watching some analyst on the news today and he said if the government wouldn't have bailed out Citi Group they probably would have collapsed today (Monday) and this could have led to a run on the banks for cash. They have over 300,000 employees worldwide and hold millions of global and personal accounts.
While I feel the American auto industry could be allowed to collapse, I think there are some industries such as banking that are just to important to allow to collapse. In five years Citi Group will be making money hand over fist again and the bailout will be justified. Maybe using taxpayer dollars is not the right solution but it really seems like the only solution available (besides a global depression) at the moment. I personally would rather turn some of my tax dollars over to bail out segments of corporate America than have to live through a depression, especially a global one. |
Bankruptcy courts could sort it out. Citi is a failed company and will remain so. But as to why you think that there are some industries such as banking that are just too important to allow to collapse:
http://www.nakedcapitalism.com/2008/11/finance-has-lost-sight-of-its-role.html
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Why are we in the mess we are in? There are lots of proximate causes: overleverage, global imbalances, bad financial technology that lead to widespread underestimation of risk. Readers can no doubt improve on that list.
But these still are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.
I will confess to not having addressed this particular line of thought directly, even thought it has crossed my mind plenty of times. Many readers have noted, and I agree completely, that the financial sector has become too large relative to the real economy. But many commentators, your humble blogger included, have failed to probe deeply how such a distorted economy came to be seen as a good policy outcome.
In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.
Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do (aside: I had a lawyer from an entrepreneurial family who was refreshingly aware of that issue, and would write off hours before sending bills to clients, recognizing that the amount of time her firm had spent on certain matters simply wasn't worth it from an economic standpoint to the client). It is ironic that free market fundamentalists have so vociferously argued for unfettered markets, without understanding (or perhaps understanding all too well) that the house always wins.
When I was a kid and had my first serious jobs on Wall Street, there was no explicit formulation of that conundrum, but the firms understood their place. You could make a very very nice living on Wall Street. The barriers to entry were high enough to allow for oligopoly pricing, but that meant for rich pay packages rather than an easy life. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed.
And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.
But I digress. There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire. And in the process, they keep trying to validate overly inflated asset values (a measure straight out of the failed Japan playbook) rather than try to ascertain what their real value might be so as to determine how much recapitalization might ultimately be needed (if you doubt me, Exhibit One is the pending Citi bailout, in which lousy assets will be guaranteed at phony values). Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.
And why is that? Back to the cult issue. Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults). The particular target for ire is the autoworker pensions and health plans, as well as their work rules. But the pension plans being underwater is the fault of GM management for not providing for them in the fat years; I personally have trouble with the idea that health care should vary by class; and for the work rules, German and Swedish automakers have strong unions and yet can compete. I see the UAW as having correctly seen GM management feeding at the trough and doing a good job at extracting their share.
And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.
I don't know how to convey a sense of how deeply indoctrinated we all have been. This Independent story may give a sense of how banks have completely lost sense of their place. |
http://www.independent.co.uk/news/business/news/businesses-hit-by-huge-bank-charges-1032198.html |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Nov 24, 2008 7:56 am Post subject: |
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How bad is Citi's position?
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Tangible assets, excluding goodwill or intangibles, are 55 times the bank's tangible equity. Here's how the Wall Street Journal's David Reilly explained things:
Tangible assets rise to nearly 59 times tangible equity if Citi has to bring about $120 billion in credit-card assets back onto its books in 2010, as is likely. Citi also may have to consolidate some of the roughly $670 billion in mortgage assets currently held by off-balance-sheet vehicles.
If the bank had to consolidate just 20% of these mortgage assets, tangible assets would rise to about 63 times tangible equity. Citigroup thinks it is "highly unlikely" it will have to bring back on book much of these mortgage assets. Even so, Citi needs to take more radical action to reduce its leverage. The job cuts are simply a step in the right direction.
Translation: there is no residual value left for shareholders if Citi goes down. The bank continues to operate simply because it still has liquidity and thanks to the Federal Reserve and the Treasury Department it probably cannot run out of liquidity.
Let's just take one little slice of Citi's problems. Citi has $16.9 billion of commercial real estate mortgages and mortgage backed securities sitting on its trading book. There are marked at 86 cents on the dollar. Do you believe that CMBS are going to hold at that level? Neither do we. The bank�s exposure represents about 17% of tangible equity, according to Sandler O�Neill. That far outstrips JP Morgan Chase and Bank of America, each of whom has reduced their exposure to single digits.
Credit default swaps are soaring. Right now they are priced at $425,000 to protect $10 million of debt against default for five years. For reference, Bear Stearns' CDS were priced at $730,000 on the Thursday before the Fed stepped in. But that was before we knew the government would consistently bail out creditors and counterparties. |
http://clusterstock.alleyinsider.com/2008/11/get-ready-for-another-rescue-weekend-citi-c-shares-are-toast
This company cannot be fixed. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Fri Nov 28, 2008 5:36 pm Post subject: Re: Citigroup is toast. |
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| mises wrote: |
Either Citi or BofA was going to tank. Maybe both.
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And now BofA?:
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After Citi, is Bank of America next?
NEW YORK (Reuters) - A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers.
Bank of America, the No. 3 U.S. bank by assets, has loaded up on mortgages as the world's largest economy wrestles with the worst housing market since the Great Depression.
The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest U.S. independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage.
If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.
"I would expect there are more banks who are in dire straits and more who can expect to be helped," said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, D.C. "The share price makes it look like Bank of America might be next in line," he said.
Before Monday's stock market rally, Bank of America shares had lost 52 percent in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup.
Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks' expectations, Bank of America would have a Tier-1 capital ratio of 7.15 percent.
The minimum that regulators seek to consider a bank "well capitalized" is 6 percent, but any ratio near or below 7 percent tends to spook investors.
Bank of America declined comment.
CreditSights also expressed concern about Wells Fargo & Co, which it said would have a Tier-1 capital ratio of 6.98 percent under its worst case scenario. Wells Fargo recently agreed to buy Wachovia Corp.
Under the same assumptions, and before the government's latest investment, Citigroup would have a Tier-1 capital ratio of 8.64 percent.
Wells Fargo, based in San Francisco, declined to comment.
To be sure, by some measures Citigroup looks worse than Bank of America and Wells Fargo, most notably the ratio of tangible assets to tangible equity, a metric on which some investors have focused.
Citigroup's tangible assets are about 42 times shareholder equity minus intangible assets, compared with 11 times for Bank of America.
The U.S. banking system is broadly undercapitalized, perhaps to the tune of more than $1 trillion, and the only investor that can bail it out is the U.S. government, analysts said. |
http://www.reuters.com/article/newsOne/idUKTRE4AN8FN20081124
This is getting extremely serious. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sat Nov 29, 2008 7:17 am Post subject: |
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Bob Rubin: Citi (C) Collapse Was An Act of God
Treasury Secretary and Citi Director Bob Rubin has begun to defend his role in the bank's collapse. His position appears to be that he is not personally responsible because he was only a director and that, in fact, no one at Citi is responsible because what nearly destroyed the firm was an unforeseeable act of God. |
http://clusterstock.alleyinsider.com/2008/11/bob-rubin-citi-c-collapse-was-an-act-of-god |
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bacasper
Joined: 26 Mar 2007
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| Posted: Sat Nov 29, 2008 7:26 am Post subject: |
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| mises wrote: |
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Bob Rubin: Citi (C) Collapse Was An Act of God
Treasury Secretary and Citi Director Bob Rubin has begun to defend his role in the bank's collapse. His position appears to be that he is not personally responsible because he was only a director and that, in fact, no one at Citi is responsible because what nearly destroyed the firm was an unforeseeable act of God. |
http://clusterstock.alleyinsider.com/2008/11/bob-rubin-citi-c-collapse-was-an-act-of-god |
So it was God who made all those bad loans and investments? |
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mises
Joined: 05 Nov 2007
Location: retired
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jaykimf
Joined: 24 Apr 2004
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| Posted: Sun Nov 30, 2008 10:36 am Post subject: |
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| Well, if Citibank is toast, I'll be buying more toast as soon as I sell something else and the cash clears. Actually, I decided to buy more last week when the price was less than $4. Unfortunately, I got distracted and put it off and the stock has since more than doubled. Still looks like a good buy to me. Looks like home run potential . Of course I've been wrong before about stocks that I thought had home run potential. Pan Am and others come to mind. Still, it's a cheap bet with a potentially huge return. The fact that short selling momentum players have beaten down the price of the stock doesn't necessarily accurately reflect the actual prospects of the company. Of course there is risk involved, but considering the price, I'd say the pot odds are with me . |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sun Nov 30, 2008 3:24 pm Post subject: |
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| You're a braver man than I Jay. |
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