Fascinating Trends & Citibank Writedown
In Crises there is opportunity.
Did you know the Citibanks biggest holder is Prince Alaweed of Saudi Arabia. Big whigs have been flying back and forth from the US to Arabia, making dozens of phone calls to the chief shareholder in Citibank.
What will be the bottom line on the write down of all this bad paper. No one knows. But many changes are coming. Old CEO's gone, new ones coming in.
The talk is that Robert Rubin, Clinton's Secretary of Treasury will be the Super Hero and try and save Citibank.
No one wants to offer up a solid number on the actual losses at Citi Bank.
What is fascinating is the business model of a dictatorial CEO who refuses advice from risk managers, merging banks into a superstore of banking services, a total lack of co-ordination and management, could be out the door.
What is fascinating is that for the first time people are talking about changing the business model. These institutions are too big and unmanageable.
What is fascinating this is just like the Silverado Savings and Loan Crises (Neil Bush) hitting the risk industry and the world markets.
Just like the Bush Presidency has dramatically changed the political landscape and left conservatives wandering around headless looking for a leader, this unethical management style of big corporations and banks seems to be crumbling as well.
Borrowing short and lending long is a bad business model.
Repackaging that overly leveraged money and using it as (fake) capital in the world markets is a bad business model.
But what is exciting is that finally finally finally the business world is coming to the hard cold realization that they need a new business model, one that is smaller, more nimble and more open to in it's management style.
This bodes well for the little guy that progressives are trying so hard to stand up for! I hope!
____ A short dairy for those interested in discussing what is going on in subprime meltdown and the markets. This should be an interesting week!______
- missliberties's diary
- Login or register to post comments
Comments :
Quiz Question
What is the biggest company in the world even bigger than Exxon Mobile.
-----+++++$$$$$$+++++-----
The Opening Bell Is Ringing for Change
It is the economy, stupid.
It's a lot of money whatever the final solid number turns out
to be:
Alright, I'm not an econ or market guy, so lemme see if I got this more or less straight. Basically Citi got caught when too many (credit-risk) homeowners with subprime mortgages couldn't pay, right? My naive question: where did all the equity go? I mean, why aren't these heartless banks foreclosing on the houses that supposedly backed the mortgages that were bundled into the securities? My other question: who is actually losing money, and how? Investors, obviously, but I guess this has a fairly wide impact...
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
The losses are unrealized....
These loans are securitized. The losses on the loans at this point are unrealized it's a matter of accounting on how it should be valued on the books. Citi is supposed to take a loss because the spreads of the securities have widened -- it's not necessary that loans are defaulting.
Right now, Citi's SIV pool is $80B. If those assets were worth 90cents on the dollar (nobody knows, but that's what's thrown around) then Citi would write down $8B; However, the face value of the securities is still $80B so if everyone paid their loans, Citi would later realize a gain of $8B on the value of the securities. (Not saying that's a likely scenario, but just to demonstrate the nature of marking to market valuations vs. realized losses.)
Re: who takes the losses: Citi and their shareholders.
Thanks, very helpful
and thanks MissL for introducing the topic.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
Missl....some good/some bad....
Banks must earn a spread on their lending activities (while maintaining reserves). Often, borrowing short and lending long is a good way to accomplish that. Earning an interest spread is fundamental to what makes a bank a bank, and also a givaway that you pull some of this stuff out of thin air.What's not a good business model and never has been a good business model is taking risks not commensurate with return.
There's truth to this. Big organizations naturally do not grow as quickly. Management may feel the pressure to take larger risks, and in general, steering these organizations is like steering the Titanic. The Titanic took too big risk and was unable to steer away from the consequences. But I'll stress that it's often easy to identify risk after the fact. It doesn't make these guys dumb or immoral.
So what will be the change in Citi's approach? Well, it does appear that a smaller, more nimble organization could be on the way.
Okay but....
the borrowing short and lending long is just the simplest way to put the problem. The problem is much more complex.
The institution being too big, is that some of Citibank is a bank of some of it is not. There are too many 'businesses' or separate interests under one roof without any co-ordination from leadership.
The big deal isn't the sub prime mortgage crises it is the sivs, or how the money was bundled and resold as captial for investment even though the mortgages were not paid.
Why didn't the CEO listen to the risk managers? He was arrogant and isolated is the word on the street, just like the CEO of M. Lynch. There was lots of rankling and disagreement behind the scenes.
Did you see the piece about the Arabian Prince from Rhiad being the 'go to' guy over the week end. Interesting.
This is about the business model, unregulated capital and the one size fits all 'super size me' mentality of running a business, imho.
And since I am half crazy........
The most fascinating piece of all of this for me, is that the po folk, that got sold a bill of goods, (loan sharks, and lenders) don't have to lift a finger in protest for the big money whigs to realize that this much inequity in the lending market is not working.
Sort of the silent protest of the poor who can't afford to pay their homes off. And the problem is that that are so fricking many of them, that these peons are having a huge impact on the loan industry.
My sense is that the markets are happy that these finacial engineers that have brought down Citibank amd others are thrilled with the shakeup in leadership, because it was way way overdo.
And I am not the first person that has compared this to Neil Bush's silverado savings and loan crises, only on a much larger scale.
It is the economy, stupid.
The Credit Crunch
The watchers of the banks are still scratching their heads, as to when the gloppy mess from hiding bad paper off the balance sheets will ever end.
Larry Summers
Or in order to have economic growth you have to have investment capital. The tightening credit markets has so many 'unknown knowables' and is risk averse at present. The question is where is their capital and do they have any?
WSJ Analyzes Recession Fears
The last Bush recession was triggered by the Silverado Savings and Loan Crises, which involved Neil Bush, brother of George.
What is it with the Bush family and credit markets. Senior Bush's rule was marred by a credit crunch. Now Junior Bush's has topped his father..... by a landslide. This credit crunch looks to affect world markets for possibly decades, at least that is Larry Summers opinion.
What's next in this roller coaster ride?
It is the economy, stupid.
IF regulations had been implemented
or perhaps more accurately NOT ignored, then this whole credit crunch the financial markets are wringing their hands over would not be happeneing.
Allowing lenders to skirt regulations risk assessment managers to avoid any kind of transparency or oversight (presumably for competitive advantage) has brought us this financial meltdown.
Why is no one mentioning this little tidbit?
Regulations would have prevented this messy large scale credit crunch.
It is the economy, stupid.
Why
you might ask was this pushed by Greenspan and Bush's financial wizards ........
So that the 'I don't want to pay for it', 'don't tax me crowd', who advocated for the Bush tax cuts during a Time of War could float the economy by falsely inflating the value of your home and making it easy to borrow on that value.
It is the economy, stupid.