The New York Times reports on the sell-off today: "The sell-off began after Citigroup, the world’s biggest bank, was hit with a downgraded rating from an influential analyst group, which recommended the bank cut its stock dividends to raise funds. Citigroup wrote down $5.9 billion in assets in the third quarter after losses stemming from mortgage-backed securities and bad bets on asset backed commercial paper. The bank is considered a bellwether of the financial sector, which has faced a battery of poor earnings reports and credit troubles."
Citibank rang the bell earlier. Here is an extract from my new unpublished book that I discussed yesterday:
Citibank had been intent on "selling" -- many used the more accurate, term "pushing" (see Darity and Horn 1988) -- as much credit as possible to Latin America, so much so that Citibank had been getting nearly 50 percent of its revenue from its loans to Latin America.
The bank made these loans without much thought about the ability of Latin America to repay them or without putting adequate reserves aside to cover potential defaults. As a result, the company became deeply enmeshed in the Latin American debt crisis. By 1991, some Citicorp debt had been reduced to junk bond status. Public figures, as diverse as Representative John Dingell and Ross Perot, described Citibank as insolvent (Zweig 1995, p. 867 and 872).
Matters became so dire that the president of the New York branch of the Federal Reserve Bank had to fly to Saudi Arabia to arrange for Prince Alwaleed Bin Talal Alsaud to invest another $1.2 billion in the bank in late 1990. The Federal Reserve also had to be sure to keep interest rates down long enough to salvage the bank (Woodward 2000, p. 73).
[This material comes after a section describing Citibank's leader, Walter Wriston, writing a book that Thomas Friedman "borrowed" in his The Lexus and the Olive Tree.]
Would that have been Mr "countries don't go bankrupt" Wriston's 1992 book, The Twilight of Sovereignty ?
ReplyDeleteExactly, Juan. It did not do as well as Thomas Friedman's remake, but his take on the Golden Herd is almost identical, but without Friedman's superficial tact.
ReplyDeleteI have a suspicion that the interest rate cut the Fed just did was partly done out of their being aware that this latest news out of Citibank was about to hit. Ironically, it tanked the Asian markets, now spooked that the Fed thinks there are big problems, although part of that tanking has had to do with the subprime mess showing up directly in the Japanese financial sector.
ReplyDeleteCitigroup’s 'Level 3 assets' to equity ratio on 5th November is 105% according to 'Bernard' (a commentator at the Nouriel Roubini blog).
ReplyDeleteQuoting Bernard:
Level 3 Assets explained:
Financial assets and liabilities whose values are based on prices or valuation techniques that REQUIRE INPUTS that are both UNOBSERVABLE and significant to the overall fair value measurement.
These inputs reflect MANAGEMENT'S OWN ASSUMPTIONS about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage related assets (including loans, securities and derivatives), and long-dated or complex derivatives including certain foreign exchange options and long dated options on gas and power).
Level 2:
Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a) QUOTED PRICES FOR SIMILAR ASSETS OR LIABILITIES in active markets (for example, restricted stock);
b) Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage related assets, including loans, securities and derivatives).
These definitions are found in Merrill Lynch's August 2007 10-Q filing:
http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0000950123-07-010810&Type=HTML
Level 2 also allows for playing games, because it is based on using quoted prices for other assets considered to be "SIMILAR". What constitutes SIMILAR?
Again, this clearly leaves room for manipulation. If they are playing games with Level 3, you can rest assured they are playing games with Level 2 as well.
And that doesn't include any of CitiGroups expected exposure to the $40 trillion (est) mountain of 'credit default swaps'.