Big Surprise: Citi and BoA Fail Stress Test

Tuesday, April 28, 2009

From the Wall Street Journal.

Ken Lewis on life support. Pandit, too (though it really wasn’t his fault).

The real problem here is one, to repeat an oft used explanation, of confidence. No one believes the banks or the government. Any reasonably informed person sees what Geithner and Bernanke are doing and breaks out in a cold sweat. Borrowing and printing money to reinflate a bubble (our economy) is either genius or suicide. To me, it is most assuredly the latter.

We are in for years of topsy-turvy hard times with the outcome far from assured. Forget ripping the band-aid off quickly, they’re wrapping it up in bandages made of dollars. It’s going to hurt a lot more when it finally comes off.


Merry Christmas to Citi

Monday, November 24, 2008

It had to happen, and so it has.

The Treasury department in coordination with the FDIC and the Fed has bailed out Citigroup. Here is a summary of the deal terms.

The bottom line is that this is a very good deal for Citigroup. They get $20 billion and a 90% guarantee (from you) on all of their junk assets (after the first $29 billion in losses) and in return they merely have to issue a little preferred stock to the U.S. Government. Citi should no longer have liquidity problems as they will likely be able to raise cash against the government’s guarantee (after all, if there’s no downside risk, why not?) Two other key sections:

USG will provide institution with a template to manage guaranteed assets. This template will include the use of mortgage modification procedures adopted by the FDIC, unless otherwise agreed.

Compensation: An executive compensation plan, including bonuses, that rewards longterm
performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG.

The mortgage modification aspect is important and the FDIC is involved (they have a smart, workable plan). Although I am opposed to all of these bailouts in principle (in practice, something must be done), it is essential that we provide relief to homeowners as well. They are the root of the problem, and though they are as guilty as anyone, fairness and financial common sense dictates that we help them too.

As for compensation, the Feds should insist on a UBS model of pay for performance. That is, payment spread over three years with modifications based on continued performance. They should also set ceilings on reward.

There is one other problem with this bailout. From the Wall Street Journal:

The agreement marks a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions…

…Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.

“The problem is that other banks would want to get in line” for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. “Is there enough money to do that?”

This is the problem, isn’t it? We simply can’t afford to take all of the junk assets off the books of financial institutions. And yet, ultimately, I’m afraid, that’s exactly where this is headed. Who’s next in line for some taxpayer largess?

I now see an outline of how this will end. The Government will pick and choose who to bailout and guarantee their junk. Working with these institutions, they will aggressively prune irredeemable loans and modify the rest. Taxpayers will take the loss. And on the guarantee the institutions will raise the cash they need to begin soaring again.

Uncle Sucker (you and me) will take it on the chin while a lot of bankers and irresponsible borrowers get away with it. Sure, there will be a few prosecutions, but for the most part, we’re just going to have to like it.

And, by the way, it’s still going suck out there.

Merry Christmas to Citigroup.

Citi Chats with the Feds

Saturday, November 22, 2008

Will they last the weekend?

From the New York Times:

With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.

In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company.

Is Citi Next?

Thursday, November 20, 2008

Financial stocks continue to plummet with Citigroup in the most dire position. Citi closed at $6.40 yesterday, down 23% (if you have a 401k or IRA of some kind, you probably felt this loss).

The good news? Citi was looking up:

Citi shares staged a rare rebound in early trading, moving up about 6 percent in premarket trading on news that Saudi Prince Alwaleed Bin Talal Alsaud had upped his stake in the company to 5 percent and gave his full support to the bank’s top management.

Nevertheless, this is a terrible, terrible sign. Citigroup is, like Bear, AIG, and Fannie and Freddie, too big to fail. This is truly a suckfest.

Merrill Lynch Steps Up and Takes A Hit

Tuesday, July 29, 2008

By writing down the value of $30 billion in CDOs to the tune of 22 cents on the dollar, Merrill Lynch may have positioned itself to begin moving beyond the subprime mortgage crisis. The action, which some believe may set-off a chain of similar discounts, can’t be easy for Merrill’s shareholders, but it does, at least, put a price on some of the previously impossible-to-value debt obligations.

Now we’ve got to watch and see if Citi, UBS, Lehman, and whoever else, follows suit. There are buyers out there willing to take this kind of debt off the banks’ hands at that price. It ain’t pretty, but it may mean a fresh start. And right now, the banks desperately need to get out from under it.

It is a tough but good move by Merrill.

Update (7/30/08): This deal is looking less good. Merrill has apparently given up all profits, but remains on the hook for potential losses because they lent most of the purchase price to the private equity firm (Lone Star Funds) that bought the CDOs. D’oh! Read about it here.