Goldman Sachs & Citi Still Running The White House

How Goldman Sachs and Citi Run the Show

The Wall Street White House

By ANDREW COCKBURN

Robert Hormats, Vice Chairman of Goldman Sachs, is to be installed as Under Secretary of Economics, Business, and Agricultural Affairs. This comes as one more, probably unnecessary reminder of the total control exercised by Wall Street over the Obama administration’s economic and financial policy. True, Hormats is “a talker rather than a decider” according to one former White House official, but he will find plenty of old friends used to making decisions, almost all of them uniformly disastrous for the U.S. and global economy.

Among the familiar Wall Street faces that Hormats will encounter in his new post will that of Deputy Secretary of State Jacob Lew, lately Chief Financial Officer of Citigroup Alternative Investments Group which lost $509 million in the first quarter of 2008 alone. On visits to the White House he is sure to bump into Michael Froman, who also tore a swath through the Citi balance sheet at the alternative investments shop (they specialized in “esoteric” investments such as private highways) but is now Obama’s Deputy National Security Adviser for International Economic Affairs. If Froman is otherwise engaged, Hormats can interface with Froman’s deputy, David Lipton, who was until recently running Citi’s global country risk management effort.

Citigroup is also well represented at Treasury, in the form of Lewis Alexander, formerly the bank’s chief economist and now Counselor to Treasury Secretary Timothy Geithner. Given the role played by all of the above in bankrupting us all, Alexander’s 2007 verdict on the onset of the mortgage crash, “I think that’s not going to spill more broadly into the economy and so I think we’re going to have a normal kind of housing cycle though the middle of this year,” can only have been a recommendation in the eyes of his current employer.

Alexander’s function at Citi may have been merely to endorse the financial depredations of colleagues with economic blather, rather than exercise loss-making functions personally. Not so Deputy Treasury Secretary Neal Wolin, who has moved over to the number two job at the department from the Hartford Insurance Company, where he served as president and chief operating officer of the Property and Casualty Group. Hartford was one of the insurance companies that got suckered by the banks into backing their ruinous investments in real estate and other esoterica, but Wolin’s Treasury has just handed Hartford $3.4 billion of our money in the form of TARP funds.

Hormats’ agricultural responsibilities will of necessity bring him into frequent contact with the Chairman of the Commodity Futures Trading Commission, Gary Gensler – a former Goldman partner. As Assistant Secretary of Treasury in the Clinton Adminsitration Gensler played a key role in greasing the skids for the notorious Commodity Futures Modernization Act of 2000, which set the stage for the great credit default swaps scam that underpinned the recent bubble and subsequent collapse. News of the appointment did generate threats of obstruction in the Senate – any one of the senators could have blocked the appointment had they really wished to do so – but such threats proved predictably hollow. Had they been otherwise, Treasury Chief of Staff Mark Patterson could of course have lent the expertise he gained as Goldman’s lobbyist to overcome the obstacle.

For sheer gall it would be hard to equal the appointment of Gensler, one of the engineers of this catastrophe, but the administration has managed it with the selection of Linda Robertson, formerly a key Enron lobbyist and intimately involved in pushing through the commodity futures act as chief flack for the Federal Reserve. Prior to joining the crooked energy-trading firm, Robertson was an important figure in the Clinton Treasury Department, latterly serving her friend Larry Summers and before him Robert Rubin during their terms as Treasury Secretaries.

Such connection to the key enablers of our bankrupt casino helps explain many of the other hires listed above. Michael Froman was Chief of Staff to Robert Rubin at Treasury before following Rubin to his reward at Citigroup. Most significantly, it was Froman who first introduced Rubin to his Harvard classmate Barack Obama. David Lipton also served in the Rubin Treasury, as deputy under secretary for international affairs. Neal Wolin, on the other hand, appears to have more an acolyte of Summers, who cherished him as Treasury General Counsel from ’99 to ’01. Summers and Robertson were similarly close, and certainly he raised no objection to her fatal submissions on behalf of her paymasters at Enron.

Recent reports suggest that financial industry lobbying in Washington, at $104.7 million for the first three months of 2009, is 8% down on last year. But that is to be expected – why should Wall Street continue paying top dollar for a wholly owned subsidiary?

Recent White House Appointments for ex-GS and ex-Citi bankers:

• Robert Hormats, Vice Chairman of Goldman Sachs, is to be installed as Under Secretary of Economics, Business, and Agricultural Affairs.

• Jacob Lew, Chief Financial Officer of Citigroup Alternative Investments Group, as Deputy Secretary of State
(Lew’s dept. lost $509 million in the Q1 2008)

• Michael Froman, Citigroup, Deputy National Security Adviser for International Economic Affairs. Froman was formerly Chief of Staff to Robert Rubin at Treasury, before following him to Citi.

• Froman’s deputy, David Lipton, ran Citi’s global country risk management effort.

• Lewis Alexander, Citigroup’s chief economist and now Counselor to Treasury Secretary Timothy Geithner

• Neal Wolin, President and COO, Hartford Insurance Company, Property and Casualty Group now Deputy Treasury Secretary (Hartford received $3.4 billion in TARP funds).

• Gary Gensler, Goldman Sachs partner, now Chairman of the Commodity Futures Trading Commission Note: It was Gensler who was a key proponent (as Clinton’s Assistant Secretary of Treasury) in pushing the Commodity Futures Modernization Act of 2000.

• Mark Patterson, Goldman Sach’s lobbyist, now Treasury Chief of Staff

• Linda Robertson, Enron lobbyist, Chief PR Federal Reserve

p/s photo: Aum Patcharapa Chaichua

Next Market Catalyst - Banks Stress-Test Results

The next catalyst for the US markets has to be the government's stress-testing of banks' results. Most analysts and commentators can only guess what the parameters are like. Some banks will be asked to raise additional capital due to the results of the stress-test.


19 banks were asked to submit to the test. If we look at the table for comparison, their Tier-1 capital would be a start. Those around 10% or below would fall under the "danger list", but its not all definitive, its probably one of the many factors that the government looks at. But Wells Fargo, Bank of America, even American Express and PNC Financial would fall under the "to be watched" category.


Of greater importance will be the Tangible Common Equity Ratio which has been harped on by Bernanke and Geithner. I think this measurement will be more critical. I would worry if the ratio is 4% or lower. Bank of America stands at just 3.1%. Citigroup is making me nervous at 1.7%. PNC Financial is there again at 3.3%, and US Bancorp is also there at 3.7%. Wells Fargo, despite registering such wonderful profits is there at 3.3%.


I think those that are below 4% will be barred from returning TARP funds back to the US government. Which is to say the Bank of America and Wells Fargo will still stay under the "jurisdiction of the US government" and will have to toe the line a lot more when it comes to compensation matters.


JP Morgan and Goldman Sachs are in the clear, and Goldman can return the funds should they wish. Returning the funds would allow Goldman to soothe executive nerves on drastic changes to their compensation scheme, and may act as a buffer to retain and attract talent in this difficult environment.


Even if Bank of America and Well Fargo may be asked to raise more capital. It is not a death sentence. It could just mean that these banks will have to try to convert existing preferred shares into common stock. We have to remember that when Citigroup did a similar announcement of the plan, it rocked the share price of Citigroup. The blessings of the stress-test is that it will make more transparent the health of major US banks. Even though some may be asked to raise more common equity capital, the general view should be more of a relief to investors that these banks are continually being subjected to more screenings and testing of their viability. The end result of the stress-test is probably a boost to confidence and may actually see banking stocks moving up higher in tandem.

In February, the Obama administration said 19 bank holding companies with more than $100 billion of assets would have to undergo a stress test. The move was designed to calm fears about the solvency of the banking system. The exams, conducted by more than 150 federal regulators, analyzed potential losses from residential mortgages to complex securities products. Banks will have several days to challenge the findings before the government makes results public the week of May 4.

p/s photos: Janice Man Wing Shan (a model turned actress, she will be a wonderful actress in the future judging by her stunning acting chops displayed in Love Story and La Lingerie)

Citi Is Scrambling To Survive

The near bank nationalisation of Citgroup sent its shares spiraling downwards. Didn't Roubini advocate bank nationalisation? Was the move bad? The government's term sheet proposed the conversion of Citi preferred stock into common at a price of $3.25. The face value of Citi preferred stock is $25, implying 7.69 shares of common to be received per preferred share (at $3.25). If all the preferreds convert, the common shareholders will see a 75% dilution. What that means is that assuming earnings go back to what it was 5 years ago, the EPS would have to see a similar 75% dilution in real EPS just by the sheer amount of new common shares. So, if you think Citi was going back to $40 like in the old days - similar earnings 5 years ago would only make the current Citi share to reach $10, and that is a wildly optimistic view now. Citi should be locked under $5 for the next few years.

Following the announcement, Citigroup traded at around $1.60 on Friday, a preferred share holder would effectively had an an implied value of $12.30 of common stock per preferred share. Citi preferreds traded down to a low price of $4.5 early in the day, after closing at $5.50 Friday, however they quickly inverted and hit a high of $9.25 as people realized the potential arbitrage, before closing for the day at $8.05 on volume of 46.5 million shares. This was an excellent arb opportunity whereby you can short 7.69 shares of common for every share of preferred purchased. This arb is worth nearly 50% return. I do believe that the government's move was "positive" for Citi. However there are some unknowns still in the conversion amount, and added to that the arb opportunity caused persistent selling in the second half of the day.

The uncertainty also affect the arb in addition to shaking down the share price. There was a footnote in the Citi illustrative example of how preferred to common conversion would take place, where Citi noted that the government will provide separate treatment for private and public preferred shareholders: "Ownership assumes conversion of publicly issued preferred stock is done at a significant premium to market, while the U.S. Government's and privately placed preferred are done at par." Which is to say the rest of the preferred stock's conversion rate is still unconfirmed.

The arbs are now hoping that the premium for their publicly purchased preferred shares will be lower than the "guaranteed" 50% return they would pocket if they executed the trade at the end of the day, as otherwise they face massive losses on the conversion. If not, the whole arb trade will collapse and you will see massive short covering in Citgroup shares.

The government's move is good as it will give effective control to the government, hence the bank would be more than likely to be biting the bullet on some of the niggling issues which many troubled banks have been neglecting to do - sell down the toxic assets; work closer with private equity and hedge funds to take some of the toxic assets off the books. The other good from the move is that Citi will save from having to pay dividends/interest on the preferred stocks that have been converted. Don't laugh, that is worth some $10bn over the next few years, which is as good as receiving a capital injection of $10bn to Citi.

The other reason for the sell down is the amount new to be converted stock that is coming onto the market for Citi by the preferreds. The key to raising confidence in Citi was to massively increase its tangible common equity, a measure of capital that shows the value attributable to common shareholders. TCE doesn't include securities such as preferred shares. Citi's TCE prior to the new move was at a shaky 1.5%, now it should go above 4.3%. Citi still has to convince Singapore's GIC and Abu Dhabi I.A. to convert their preferreds - a move not palatable to them but in the end they will have little choice really. Expect Citi shares to swing wildly over the next few days but I expect reality to sink back in and go back above $2, some short covering to come in as well.

p/s photo: Marion Caunter

Citi Is No Siti

Citigroup is likely to get $6bn in capital gain and a cash payment of $2.7bn when the deal to sell its brokerage unit to Morgan Stanley is successful. Citi was hammered yesterday when the rumours of the potential sale of Smith Barney looked to be a reality.

The sell down in Citi was prompted by genuine fears that Citi still needed to sell strategic assets after getting such a sweetheart deal from the US government. Citi has gotten so far: $25 billion in capital, followed by another $20 billion, followed by $306 billion in loan guarantees. If you looked at those numbers and still the bugger has to sell Smith Barney... well, look out.

To be fair, its not an outright sale yet but more of a joint venture for now. The latest version of the proposed deal has it that Morgan Stanley would pay Citi $2.7bn in cash for a 51 per cent stake in the joint venture combining their brokerage units. Morgan Stanley would get an option to buy a further 14-15 per cent of the venture after three years and raise its stake by a similar amount two years later.

Citi's arguably two most reliable income stream has to be the predictable income stream from the Smith Barney brokerage operation, and the hugely profitable and successful Banamex, which has a presence in Mexico that borders on the monopolistic. Now it looks like Citi is looking to sell both. How deep in shit you have to be to consider selling your best two income streams?

Citigroup lost nearly $10 billion during the last three months of 2007. The bank racked up more than $22 billion in bad loans last quarter. Citigroup's fourth-quarter operating losses could top $10 billion. Technically, you add the $10 billion from the last 3 quarters and if its also $10 billion for the final quarter - that is $20 billion, basically almost wipes out half of the $45 billion injection by Treasury in the initial bailout plan.

Not good, not good at all.


p/s photo: Siti Nurhaliza

The Men With The Golden Gun

Readers of this blog will know that I have a long position still in gold as I expect real assets to come to the fore in the wake of excessive liquidity injection and the upcoming decimation of value in major currencies. There have been two parties who have just come out with bullish calls on gold, namely Citigroup and Marc Faber. While I am certainly not as bullish as Citigroup, which said that $2,000 for gold is possible, I do think $1,250 is probable by end 2009.

The bank [Citigroup] said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Celebrated contrarian investment advisor Dr. Marc Faber told Bloomberg television last weekend that he was buying gold exploration stocks as well as gold producers because prices were ridiculously cheap.

Dr. Faber wrote the book Tomorrow’s Gold earlier in this decade and has long been a holder of physical gold as a hedge against inflation and a meltdown in the global financial system. But he has previously not recommended buying exploration stocks, arguing that they could fall in price and that many companies could go out of business.

Given the huge slump in the values of gold exploration stocks over the summer he has, once again, been proven correct. However, the investment guru is now preaching with all the enthusiasm of a convert to the cause. Gold exploration stocks are leveraged to the gold price. Last week Citigroup - which Dr. Faber says should have been left to go bankrupt and not bailed out by the US government in a $306 billion deal last week - said gold may go to $2,000 an ounce in 2009.

Granted the link between the gold price and exploration stocks - remember the latter own the rights to potential future gold field development rights or claims - then such a price hike would mean an even bigger increase in the value of exploration stocks. That these stocks have been beaten down to almost nothing in the recent stock market crash just makes them a better buy. Dr. Faber is the first major commentator to make this call - and it comes against the worst performance in this sector in 40 years.

p/s photos: Kae Chollada

Some Direction At Last, Some Market Leadership

Well, this post is written after the plan by FDIC and Treasury on Citigroup. So, where are we now? The first thing was Obama made the right choice in appointing Timothy Geithner (please reread posting on the new Treasury Secretary). The market basically rallied over 4% on Friday over the news. Can the appointment alone charge up markets? Yes, especially in the current market situation where there is little confidence, little direction, high volatility, basically no market leadership.

The best thing for Geithner to do is to grab the markets by the neck and tell them "This is the way ahead, follow me and I will guide you towards the light (no pun intended, obviously)". Geithner, as mentioned before is a market interventionist. He was critical in lining up the JP Morgan / Bear Stearns deal, he was instrumental in getting the funding for AIG, he tried to save Lehman but was dissuaded by higher powers ...

The market basically saw in Tim, a person who will not let things get blown out of his control. It was very easy to predict what he would do in a Citigroup situation. The new rescue package for Citigroup was assembled with Tim's input, and it was a package that tries to cover even the most extreme situation Citigroup could find itself in. Naturally there will be many naysayers that will criticise that the package will not work.

To me, its a very substantive package, watch the shorts try to stampede out of Citigroup in a hurry tonight. Why is the package so good? I did mention that Treasure could follow the UK prescription for Royal Bank of Scotland, whereby they injected capital for actual shares, thus controlling the bank. Instead a softer version was adopted, the Swiss version, on how they bailed out UBS. But in reality, the package is a Swiss UBS package with a subsequent evolvement to the UK RBS method as future losses, above the preset levels, will see the government absorbing the loss in exchange of an equity stake in Citi - so prediction stayed true.

First, there is the additional $20bn capital. Two, the guarantee on $300bn of toxic assets, phew. Thirdly Citi is only liable for the first $29bn of losses, as I mentioned earlier, without the package, Citi would probably have to incur losses totalling at least $50bn for the next 3 quarters. Now that has been largely eliminated.

Fourthly, most importantly, confidence is restored. Global bank run on deposits would now start to reverse. Fifthly, no dividends for 3 years (or just 1 cents actually) - this has to come from the government as management has no balls to say no more dividends (Alaweed no happy man, no feel like smiling).

The 8% payment on $7bn to Treasury is a cheap way to raise funds. This move will make it SO MUCH EASIER for Citi to go to sovereign wealth funds to tap additional capital. Mark my words, Citi will easily raise another $10-15bn within weeks, which will further boost its defence system.After the deal, Citi's Tier 1 capital ratio at Sept. 30, on a pro-forma basis assuming the October capital injection and the new capital announced on Sunday, is expected to be 14.8%. Its tangible common equity would be about 9.3% of risk-weighted managed assets, Citi said.

We have market leadership. Expect a sharp revival in Citi, and possibly a new bottom at 8,000 for the Dow.

p/s photos: Haruna Yabuki

Update On Fate Of Citigroup

This is probably not a politically correct joke, well not really a joke as it actually did happened, but hey....loosen up. A private banker called up a client telling him that Citi was a great buy below $5. The client half-jokingly said, "What, you kidding, I'd never buy an Indian bank". I guess its not just Vikram Pandit but a huge layer of the bankers at Citi happen to be Indians - I told you it was not politically correct!

Anyway, some updates on the probable fate of Citigroup. The shorts are doing it to Citi, make no bones about it. Will Citi go bust? Very unlikely. The bank has $2 trillion worth of assets, the question mark is how much will have to be written down. Hence even below $20bn in market cap, Citi may not find buyers for the whole bank unless they come with Treasury backing and guarantees.

Citi has kind of been off the radar when Lehman and Bear Stearns were collapsing because of their strong deposit base, in particular from outside of the US. It has some $880bn in deposits, but the scare over the last few days probably would have seen at least one third of those deposits being pulled out. I doubt very much Citi can function without some kind of help over the next few days.

The interesting bit was that the company bought back $17.4bn in assets it could not offload under the SIV. If you were really in trouble, would you do that as a priority? Citi saw Alaweed upping his stake from 4% to 5%, that didn't help. Citi got a $25bn injection from TARP, that seems to be insufficient. The estimated further writedowns over the next 3 quarters could come up to another $50bn. Take that with a much reduced deposit base, and Citi would find it very hard to raise funds or have sufficient capital to do business. While HSBC or even Royal Bank of Canada would have the muscle to buy Citigroup now, none will try as they will not get any special treatment from the US.

For JP Morgan or Morgan Stanley to buy, they would probably only do it with guarantees from the Treasury. Following the hoopla over the deal with JP Morgan and Bear Stearns, I doubt the Treasury would want to take that path again.

A seizure by FDIC would be bad news generally as Citi would be broken up and sold in parts. A most likely scenario now would be for Treasury to become the majority shareholder of Citigroup by pumping in at least another $50bn in exchange for new shares. Taking a leaf out of UK's experience with Royal Bank of Scotland, that seems to work. Treasury could then slowly sell down its stake when Citi gets out of trouble a few years down the road.

As it is, Citi is a unique animal. Its reach is far and wide. If it was Bear Stearns or WaMu, nobody outside the US would bat an eyelid. But mention Citigroup, it trades and do business with almost every corner of the globe. The international pressure on Paulson and Bernanke to "save" Citi would be overwhelming. If that route is chosen (as I think is most likely), we should see it trading back at $10 minimum, thanks also to the short squeeze on the shorts. For the time being, that seems to be a realistic solution.

p/s photo: Nozomi Sasaki

What Should Happen & What Is Likely To Happen

General Motors

What Should Happen - Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.

What Is Likely To Happen - Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy. The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.

Citigroup

What Should Happen - JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.

What Is Likely To Happen - The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.

Other Potential "Bad Developments" In Coming Weeks & Days
a) GMAC running into deep trouble.
b) GE Capital running into deep trouble.
c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.
d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.
e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.

Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.


p/s photos: Li Bing Bing

Citi-Morgan???

You heard it here first, the next biggest bank in the world, Citi-Morgan ... it makes a lot of sense for JP Morgan... but investment bankers on both sides will shudder because there is almost an exact replication, thus any merger will see at least 30%-40% of investment banking staff being cut. JP Morgan would value possibly the best global commercial banking franchise... provided the Treasury steps up and guarantee one or two hundred billions in losses (ala Bear Stearns). But I am getting ahead of myself, it may happen only.
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$34.48 billion

Citigroup’s current market capitalization.

$126 billion

Citigroup’s market cap in April 2008.

$178.59 billion

Citigroup’s market capitalization one year ago.

$80 billion

The value of risky “legacy” assets that Citigroup is moving off its trading portfolio and into its investment portfolio or marked “available for sale.” These assets include collateralized debt obligations, leveraged loans, mortgage securities and auction-rate securities, according to Bernstein Research. They likely would have qualified to be bought by the government under the first TARP plan to buy troubled assets.

$8 billion

The value of legacy assets Citigroup kept in its trading portfolio.

$3.5 billion

The estimated fourth-quarter writedown that Citigroup might have to take on those $80 billion of assets when it transfers them, according to Bernstein Research.

$2.8 billion

Citigroup’s most recent loss, in the third-quarter.

$2.2 billion

Citigroup’s loss in the second quarter.

$9.83 billion

Citigroup’s loss in the first quarter.

-$54,155

Citigroup’s net income per employee.

-17.51%

Citigroup’s return on equity — a measure of management effectiveness — as of Sept. 30.

15.23%

Citigroup’s return on equity as of Sept. 30, 2007.

$800 million

The price that Citigroup paid to acquire Old Lane, Vikram Pandit’s hedge fund.

$165.2 million

What Vikram Pandit earned from the sale.

$202 million

Citigroup’s first-quarter writedown on Old Lane. The bank closed the fund in June.

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Yesterday alone, Citigroup slumped a record 23 per cent to US$6.40. This beat the 21.7 per cent drop it registered during the Black Monday crash in October, 1987. Citigroup just a few days back announced it was cutting 52,000 jobs reduced its workforce to around 300,000 worldwide. When we see share price collapses in Washington Mutual, Countrywide or Wachovia, we watch things unfold as spectators. Those things don't hit Asia. But Citigroup does.

In January, the Government of Singapore Corporation (GIC) had invested US$6.88 billion in Citigroup via a convertible bond issue. Today regional Asian banks were whacked. Just considering the massive bank transactions between Citi and other banks is sufficient to make investors reconsider about counterparty risks and systemic risks. Will Citibank survive??? Citibank has an unquestionable franchise globally in banking, possibly only surpassed by HSBC. It still has enormous deposits, though much of it is from outside of the US as invetsors have pulled much of their deposits from any and every US bank. The developments yesterday will probably cause a substantial number to yank their Asian deposits out of Citigroup now. Things can snowball very fast. Fear is the worst thing when it comes to potential bank runs, then suddenly you cannot get any credit lines and things freeze up.

The selldown in Citigroup was due to Henry Paulson changing his TARP plans. Now he is not going to use the funds to buy toxic assets (as well he shouldn't because that does not add to the banks' capital at all). Hence the credit default swap market where CDS premiums on Citi has now widened to 360 bps – meaning that investors are willing to pay more to get protection against possible default on Citi. A CDS spread of 360 bps means that an investor must pay US$360,000 to get US$10 million protection on Citi.Citigroup has about US$150 billion - US$200 billion worth of distressed financial assets. Remember that Citigroup still has a lot of shit tied up with Lehman Brothers (please re-read Lehman Brothers, The Rosetta Stone posting). Now that was supposed to be taken off its book, but has since been thwarted by Paulson.

The bigger reason for Citigroup's share price collapse was the announcement that it would buy about US$17.4 billion in assets from structured investment vehicles, or SIVs, that were affiliated with Citi. It said that the move — which it called a “nearly cashless transaction” — would complete the bank’s wind-down of these troubled investment pools. Citi was a pioneer in the business of SIVs, which once made lots of money by issuing short-term notes to invest in longer-term securities with higher yields. They traditionally resided off the balance sheets of the banks that created and advised them. This meant that the banks are now starting to unind the SIVs on their own as no help is now forthcoming from the Treasury.

Citi now worth only US$34 billion, looks like JP Morgan could make a bid for Citigroup as well.... again with Treasury standing behind JP Morgan probably guaranteeing losses of up to US$100bn... one winner, many losers. After Paulson's mistake to let Lehman Brothers fail, they will not let Citigroup go down.

Cash is king, but bloody hell, where to put the cash... certainly not in a bank!

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p/p/s ... actually Citi is a very very good bet now at $6.... after Lehman Bro, Treasury will NEVER let another inv bank fail ... which means.... merger or bailout.... merger = ppl like JP Morgan will have to pay btw $15-25 per share, close to BV.... with Treasury guaranteeing a couple of hundred billions.... so there is a 200%-400% upside, its a calculated bet
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p/s photos: Aya Kiguchi

UBS Joins Goldman, Pressure On The Rest

IHT: UBS on Monday joined Goldman Sachs in saying its top executives would get no bonus this year, as public scrutiny of bankers' compensation intensifies amid the taxpayer rescue of the financial sector.

UBS said its chairman, Peter Kurer, chief executive, Marcel Rohner, and other members of the executive board would receive only their fixed salaries this year and that all other employees would have their 2008 bonuses reduced. The bank, based in Zurich, received a Swiss government bailout of about $60 billion in October after losing nearly $50 billion since the the credit crisis began last year.

UBS said that beginning next year, top executives would be paid according to a long-term compensation model that "rewards realized value creation and takes business risk into account." In profitable periods, the executives will be paid performance-based variable compensation, but in hard times, no bonus will be paid. In addition, it said, "a 'malus' can be deducted from bonus accounts" when performance merits.

UBS made the announcement a day after top executives at Goldman Sachs sent a request to the company's directors asking that they receive no bonus pay for their work in 2008, a company spokesman said. Their request was granted, he said.

The moves by UBS and Goldman Sachs turns up the heat on their competitors, including Morgan Stanley, to take similar action as they decide on year-end bonus figures in the coming weeks. Last month, Josef Ackermann, the chief executive of Deutsche Bank, announced that he would forgo his bonus this year as "a very personal sign of solidarity."

"We may see more of such bonus decisions at the top of the tree," said Andrew Oliver, managing director at Profile Search & Selection, an executive search firm in Hong Kong, on Monday.

The decision by Goldman Sachs could also ease political pressure and reduce adverse reaction to what is expected to be a bleak fourth-quarter earnings report in December, including perhaps the bank's first loss of the credit crisis. Goldman's bailout package includes some strictures on executive pay, but the industry does not view them as especially strong.

It comes after banks worldwide have been awarded or promised hundreds of billions of dollars in taxpayer bailouts. Numerous European officials, including President Nicolas Sarkozy of France and Angela Merkel, the German chancellor, have called for limits on bank executives' pay.

In the United States, public officials including the New York attorney general, Andrew Cuomo, and Representative Henry Waxman, a Democrat of California, have been warning banks not to use any taxpayer money to award bonuses to executives. Industry lobbyists and interest groups have also warned executives at the banks that any big pay numbers this year could generate a significant public backlash.

There is a widespread belief that the way Wall Street awarded bonuses in recent years helped feed the risky behavior that eventually created big losses on exotic debt securities and helped create the current crisis.

UBS acknowledged as much Monday, noting that a report it submitted in April to the Swiss Federal Banking Commission concluded that "disproportionately large risks" had been assumed within its investment bank and that the bonuses there, linked to earnings, "had not been sufficiently tied to the amount of assumed risk. In addition, the bonus payments were calculated based on short-term results, without sufficient appraisal of the quality or sustainability of those earnings."

Morgan Stanley and other banks are still formulating bonus figures. Morgan Stanley's chief executive, John Mack, took no bonus last year. Morgan Stanley, which took a loss in the fourth quarter last year but has been profitable all of this year, declined to comment Sunday. Morgan Stanley posted better results in the third quarter than Goldman Sachs.

In September, Goldman Sachs and Morgan Stanley transformed themselves into bank holding companies that take deposits, take less risk and are subject to more government oversight. That new structure may limit their ability to generate big profits, because they cannot use as much borrowed money to make big investment bets.

In the past several years, Goldman Sachs has posted some of the biggest profits and paid out some of the biggest bonuses in Wall Street history. The company's chief executive, Lloyd Blankfein, received a salary and bonus package last year worth $68.5 million.

Goldman Sachs paid its two co-presidents, Gary Cohn and Jon Winkelried, about $67.5 million each last year, more than most chief executives. All three will receive no bonuses this year.

Others forgoing bonuses at Goldman Sachs will include the chief financial officer, David Viniar, and the vice chairmen, J. Michael Evans, Michael Sherwood and John Weinberg.

p/s photos: Nok Ussanee Wattanathana

Lehman Brothers, The Rosetta Stone

The 'Rosetta Stone' is an Ancient Egyptian artifact (حجر رشيد in Arabic) which was instrumental in advancing modern understanding of hieroglyphic writing.

Lehman Brothers' demise probably caused the "banking crisis of confidence", which brought about the present state of financial markets. The massive deleveraging by funds of all kinds, the downgrading of emerging markets' debts and currencies, the flight to USD and yen, the numerous injection of liquidity into the system by central banks, the guaranteeing of deposits to prevent bank runs, the notion that nothing has real value anymore... may all be traced to Lehman Brothers' bankruptcy, or rather Paulson's refusal to save the company. Lehman Brothers may be the Rosetta Stone which helps us better understand why things are the way they are now.

Though Lehman was the smallest investment bank when it failed — and regulators decided it was not too big to fail — its demise set off tremors throughout the financial system that reverberate to this day. The uncertainty surrounding its billions of dollars of transactions with banks and hedge funds exacerbated a crisis of confidence. That contributed to the freezing of credit markets that has forced governments around the globe to take steps to try to calm panicked markets, including guaranteeing bank deposits.
The list of creditors with material exposure to Lehman Brothers is long. There will be dozens of holders of senior notes, sub debt and junior sub debt, so you can’t make too much of the fact that it looks as though the Japanese banks were laid out. We’d need to see the signatories to the Trust Indentures of the three sets of Notes to see just how many financial institutions and debt funds were exposed to Lehman’s various debt pieces:

• $138 billion of senior notes, which have Citibank and BONY listed as indenture trustees
• $12 billion of subordinated debt, with BONY listed as indenture trustee
• $5 billion of junior subordinated debt, also with BONY as indenture trustee
• $463 million of bank debt provided by Japan’s AOZORA
• $289 billion of bank debt provided by Japan’s Mizuho Corporate Bank
• $275 million of bank debt provided by Citibank N.A.’s Hong Kong Branch
• $250 million of bank debt provided by BNP Paribas
• $231 million of bank debt provided by Japan’s Shinsei Bank
• $185 million of bank debt provided by Japan’s UFJ Bank
• $177 million of bank debt provided by Japan’s Sumitomo Mitsubishi
• $140 million L/C provided by Svenska Handelsbanken
• $93 million of bank debt provided by Japan’s Mizuho
• $93 million of bank debt provided by Canada’s ScotiaBank branch in Singapore via NYC
• $75 million of bank debt provided by Lloyds Bank

Paulson obviously did not appreciate Lehman's involvement. Lehman is a leveraged brokerage shop that was the counterparty to trades sized in billions, including interest rate swaps, commodity futures, corporate bonds, international equities and real estate loans, currency swaps, and private equities. The counterparty risk created fear and triggered domino selling. Banks refused to lend to one another fearing the other end to be infested with Lehman's positions. Insiders claim that it could take over a decade to fully unwind Lehman's positions.The scary bit is that Citigroup and Bank of NY may not be out of the woods yet as things stand.

What's more, Lehman was one of the largest prime brokers to international hedge funds. Lehman's bankruptcy immediately caused wholesale panic within the hedge fund industry as funds tried to close/transfer/pull their money out of their Lehman custodian. Today over $60 billion is still locked up in Lehman's London brokerage unit. Given the leveraging nature of hedge funds, the effect on global equity markets was catastrophic as trillions of dollars were wiped off global equity markets. If you were to leverage the $60 billion twenty times (about right) it comes to $1,200 billion worth of positions that needed to be unwound.

Maybe now we can get a better grip on why so many injections of liquidity and bailouts still failed to calm the markets. The injection of capital is more than sufficient, its just that those with fresh capital are not really lending, except to very solid names. Maybe Paulson would be better off addressing the root, i.e. unwind those institutions and creditors affected by Lehman's failure. The escalating domino effect from Lehman's failure is already cascading across the globe. I hope its not too late for Paulson and the global financial leaders to stem the tide.

p/s photos: Jiang Yu Chen