Wednesday, January 16, 2008

Teetering at the abyss

So is Citigroup really a functional entity, or simply like some brain dead stroke victim lingering on permanent life support while the family, courts and the Government fight over the validity of pulling the plug?

Yesterday Citigroup announced another write down on mortgage investments to the tune of 18 Billion dollars, and a quarterly loss of 8.63 billion. This basically means that the 7.5 Billion that was injected by Abu Dhabi in November may as well been taken out to the desert, doused in gasoline and used for a Bedouin camp fire.

Despite this raging camp fire and the unbearable whine of industrial shredders in the offices of 1000s of Banks, regional lenders, Fanny and Freddy, CitiGroup announces they are selling another $14.5 billion worth of preferred stock to a new batch of apparent morons including the government of Singapore. What do they see that I don’t see?

The Mortgage Bankers association’s September numbers shows the mortgage default rate at 5.6% and still trending up all while the majority of ARM style mortgages have yet to reset. Just how much more of Citigroup’s $214 billion mortgage portfolio can go south? Certainly more than the newest 14.5 billion bail out, I would guess!

It’s not just mortgages any more either, default rates for car loans have hit 5% and credit card defaults are already creeping up, how much does Citigroup have in these categories? How many bad mortgage holders have credit lines, car loans, and several pieces of plastic.

What is really ludicrous was the Standard & Poor's rating of Citigroup that was lowered from AA to AA-, you’ve got to out of your freaking mind. You take multi billion dollar losses, write off billions more, drop the stock price by ½ in a year and require $25 Billion in asset and stock sales to keep afloat and you get your credit rating lowered by 1 insignificant level.

Of course rating agencies are the lynch pin of the entire system and they are likely under severe pressure not to do their job. The day rating agencies give the banks and especially the bond insurers legitimate ratings is the day the lights will go off on Wall Street.

Huge volumes of bonds are held by institutions and pension funds, these funds have strict rules allowing only investment grade products are held. Once the rating agencies downgrade the insurers these downgrades will taint the bonds and force many 100s of Billions worth of bonds will be dumped on the market crashing their prices.

This is the big one! Unlike the banks that will continue to nickel and dime us with repeated write downs and quarterly loses the bond market will go off like Krakatoa. Their only option is for the rating agencies to lie as long as possible and hope they can fend off law suites claiming fraud by those who bought the bonds. In the meantime the insurers will continue taking loses on failing mortgages bonds, burning through their remaining capital on the road to bankruptcy. Like the banks, some insurers like MBIA are raising fresh cash through stock sales and like Citigroup they will burn through this cash far too quickly.

This approach of lie and flounder won’t stop bond insurers from going bankrupt but this scenario might allow the impact to be staggered, the end result will be the same however a destroyed and discredited bond market that will add to the world credit freeze.

Today’s economy is like that Persian diplomat in the movie 300, standing with his back to a deep well. It's obvious that we are teetering at the abyss and any number of foreseeable and quite a few unforeseeable factors could act like King Leonidas and boot us into the pit.

I was most gratified to find that the Wall Street Journal linked my article but of course they are neither as bearish or pessimistic as I am.(I prefer the label "starkly realistic")
I was quite startled that bond insurers were even mentioned in the news, figuring that this segment of the puzzle would be verboten to the main steam media. Of course the real danger to the market should they fold was ignored!

Apparently calling the rationality of the Singapore investment community into question got me a plug here too.


James said...

Hey, I'm happy not to feel like a voice in the wilderness. Congrats on the sanity.

What do you think of this:

I like the idea of using the proportion of non-carbon elements in our atmosphere.

Carter Apps, dabbler of stuff said...

looks like it's worth a read,