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Monday, November 24, 2008

U.S. Approves Plan to Help Citigroup Weather Losses

For future reference - http://www.nytimes.com/2008/11/24/business/24citibank.html?em

Federal regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank, the government announced late Sunday night.

The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. The plan, emerging after a harrowing week in the financial markets, is the government’s third effort in three months to contain the deepening economic crisis and may set the precedent for other multibillion-dollar financial rescues.

Citigroup executives presented a plan to federal officials on Friday evening after a weeklong plunge in the company’s share price threatened to engulf other big banks. In tense, round-the-clock negotiations that stretched until almost midnight on Sunday, it became clear that the crisis of confidence had to be defused now or the financial markets could plunge further.

Whether this latest rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by losses at Citigroup and other banks. Each previous government effort initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook worsened, raising worries that more bank loans were turning sour.

President-elect Barack Obama was also working over the weekend to shore up confidence in the rapidly faltering economy. Mr. Obama signaled that he would pursue a far more ambitious plan of spending and tax cuts than he had outlined during his campaign and planned to announce his economic team on Monday. Some Democrats in Congress, meantime, were calling for the government to spend as much as $700 billion to stimulate the economy over the next two years. Federal Reserve Chairman Ben Bernanke was involved during the discussions.

Mr. Obama’s expected choice for Treasury secretary, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, played a crucial role in the negotiations on Friday but took a less active role once news of his appointment was circulated. While the initial focus of government officials was to help the embattled company, they may also seek to draw up an industrywide plan that could help other banks.

The plan could herald another shift in the government’s financial rescue. The Treasury Department first proposed buying troubled assets from banks but then reversed course and began injecting capital directly into financial institutions. Neither plan, however, restored investors’ confidence for long.

“By intervening, they are giving the market some heart to temporarily stave off some fear — but you can only push that so much,” said Charles R. Geisst, a financial historian and professor at Manhattan College.

Banking industry officials said the decision to support Citigroup, while necessary, could draw a firestorm of criticism from smaller institutions that were not big enough to be saved.

Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.

In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.

Citigroup will also agree to certain executive compensation restrictions, which will be reviewed by regulators. It will also put in place the F.D.I.C.’s loan modification plan, which is similar to one it recently announced.

The government said it was taking the step to bolster the economy while protecting taxpayers. “We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” the regulators said in a joint statement Sunday.

Inside Citigroup’s Park Avenue headquarters, the mood was tense. Through the weekend, Robert E. Rubin, the former Treasury secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M. Paulson Jr.

Vikram S. Pandit, Citigroup’s chief executive, spoke to regulators and lawmakers. Mr. Pandit also met with Citigroup’s board on Saturday, and there was no indication that they would seek to replace him.

Once the nation’s largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year now, and few analysts think the pain is over. Many investors worry that it needs more capital.

With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

Citigroup executives reached out to the Federal Reserve and the Treasury last week as they sought to stabilize the company’s stock. All major bank stocks have been battered in recent weeks, including those of Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley.

Citigroup’s shares have been hit particularly hard. A year ago they were trading at about $30; on Friday they closed at $3.77.

The plan under discussion is reminiscent of the one that Citigroup and the F.D.I.C. worked out in October with Citigroup’s proposal to buy the Wachovia Corporation. That deal fell through, however, when Wells Fargo swept in with a higher offer.

Under that plan, Citigroup agreed to bear a certain level of Wachovia’s losses, with the federal agency absorbing the rest. In exchange, Citigroup agreed to give the F.D.I.C. preferred stock.
It is also similar to an effort orchestrated by Swiss financial regulators for
UBS, another big global bank. Last month, the Swiss central bank and UBS reached an agreement to transfer as much as $60 billion of troubled securities and other assets from UBS’s balance sheet to a separate entity.


So, basically, Citi gives out $27 Billion Preference Shares at 8% p.a. yield + initial tranche of losses (if any).

In exchange, Citi gets $20 Billion cash + a lot of guarantees by the US Government, US Treasury, FDIC and Federal Reserve for up to $306 Billion of these potentially toxic and uncertain assets.

Apparently, the dilution is "slight" according to the above article. Personally, I still don't have enough info to fully evaluate it. It seems much depends on how these losses turns out. If small, then, no problem. If up to $306 Billion, then, Citi's share is only $57 Billion say. Hopefully, it's not morethan $306 Billion. In which case in the worst case scenario, the impact on Book Value does not seem very large. Certainly, at $3.77 (market cap equivalent $20 Billion) and BV of $126 Billion, at least $10 looks like a fair value ...

At the time of writing this, the after hour price of Citi has shot up to $5.24!!! Those who punted last Friday would be smiling now ...

PS. Since this is in a different time-zone, I'm going to put a limit sell order tonight to take some profits, if Citi price shoots up substantially above say $10-$12 over the next few weeks.

Sunday, November 23, 2008

Citi article

Article for future reference:


IN THE dark hours after hearing 52,000 colleagues were about to lose their jobs last week, Citigroup traders awaited the axe with a little of the black humour Wall Street is famous for. Bankers joked that Somali pirates were offering 1 cent a share for the troubled bank, if staff agreed to wear eye patches. Those with any money left were betting on how much lower their employer’s shares would go. By Friday Citi shares had fallen 60% - in a week - to levels last seen when many of those traders were still in high school.

After one of the worst weeks in the bank’s history, Citi’s officials are spending the weekend drawing up plans to prevent a repeat. The government and big investors are being lobbied to make an investment that might soothe the markets. If they fail to find a blue chip backer, odds are that, come Monday, the slide will start again. It’s a frightening fall for a bank that was, until recently, the biggest, most powerful financial services firm in the world.

Citi boss Vikram Pandit started last week on an upbeat note, addressing the firm’s 350,000 staff worldwide via a teleconference, self-styled as a cosy sounding “town hall meeting”. “We will be the long-term winner in this industry,” he said. Then came the announcement of the job cuts. In New York the redundancies started in capital markets and investment banking but this is a global firm and thousands of jobs are going in India and Germany - and several hundred are on the block in London.

The sackings failed to appease the market and Citi’s share price kept falling. Even after Saudi investor Prince Alwaleed bin Talal, a big Citi backer, pledged his support for the bank and Pandit, the shares kept falling. They closed on Friday at $3.77, a price not seen since 1995. Last November Citi’s shares traded at over $30.

Even after last week there is no end in sight. Pandit said the last three months of this year would continue to be challenging and warned of more trouble in 2009. Mounting losses from mortgages, credit card loans, and complex debt instruments could cost the bank another $3 billion (£2 billion) in the fourth quarter, according to Fox-Pitt Kelton analysts.

Citi is hardly alone in its troubles. The stock markets have turned against the rest of the banking sector too, but critics argue Citi has made a bad job of handling a difficult situation.

Last month the company was left looking flat-footed in a bidding war for Wachovia, a financial services firm. Pandit was seen to have been outmanoeuvred by rivals Wells Far-go - further ammunition to critics who say he has neither the street smarts nor the experience to pull Citi out of a hole.

But even after this decline some analysts doubt Citi will go under. The bank has some $75 billion in liquid assets on its books. Unlike earlier victims of the credit crisis, Citigroup has access to the government bail-out programme. It also qualifies for bailouts from the Federal Deposit Insurance Corp (FDIC) and the Federal Reserve.

“We are not seeing anyone lining up to take their money out of Citibank. It’s not Northern Rock. Will counterparties trade with them? I haven’t heard any rumours to the contrary,” said Brad Hintz, analyst at Sanford Bernstein. Hintz said Citi was the victim of markets that are “relatively crazy”.

But if the likelihood of Citi going bust is small, so are its options for reassuring the market. One obvious option – a merger with another large bank – might be too much for regulators put off by the giants already created by the credit crisis. “You already have too many really large banks. Who would you merge it with? The other ones already have their own problems,” said Hintz.

Goldman Sachs is looking to grow its deposits but such a huge deal would fundamentally change its business. Would JP Morgan want, or be allowed, to swallow another bank after taking on Bear Stearns and Washington Mutual?

Hintz said regulators might simply advise Citi to “sell some things”. Citi’s back-office processing business or credit card division could go. The other option is to tough it out.

Citi has been toughing it out for some time. When Pandit took over last December he inherited a company in crisis. “If you want to blame someone, blame Chuck Prince,” said one Wall Street banker.

Prince, Pandit’s predecessor, was the appointed heir of Sandy Weill, the architect of Citigroup’s global ambitions. Through a series of ever larger mergers Weill built Citi into a financial behemoth spanning everything from credit cards to investment banking and wealth management. The idea was to create a company big enough to weather any storm. And if size was all that counted, Citi would be safe. Last year sales topped $124.4 billion, not far off the GDP of Morocco. The company operates in 140 countries and deals, in one way or another, with all of the top 500 companies in the world.

Prince, a lawyer by training, steadied the ship after Citi’s disastrous dance with World-Com, Enron and other notorious firms. But he failed to position Citi for the next boom while betting heavily on the next bust. Citi’s expenses got out of control, it failed to keep up with its rivals in the good times and still managed to make the same bad bets on sub-prime loans that have shaken the banking sector to its core.

The irony, not lost on the firm’s executives, is that in many ways the financial sector has swung back to Citi’s model of doing business. In the boom Citi’s rivals were smaller, more focused and nimble; Citi was a lumbering dinosaur. Now the credit freeze has acted like the ice age in reverse and left the dinosaur standing. Both Leh-man and Bear Stearns are bust and even Goldman Sachs has converted into a banking holding company.

“It may not be relevant to investors at this moment, but, ultimately, it will be recognised that the current executive team at Citigroup was not part of the decision-making group that got Citigroup into difficulty,” Ladenburg Thalmann analyst Richard Bove wrote ina note to clients last week.

He argued that Citigroup had done “quite a bit” to put its house in order. The bank was first to begin raising capital and taking writedowns to reflect the true value of its assets. “When the write-offs are over the strengthening of the institution will be evident,” wrote Bove.

Others are less kind. The betting on Wall Street is that Pandit is out in six months unless Citi’s fortunes change. “Prince failed to do anything except to get Citi into more trouble on the way up. Pandit doesn’t seem to have much ofa clue about what Citi should do on the way down. Where’s the leadership here? What is the plan?” said one rival banker.

He said the argument that stock markets were short sighted and missing Citi’s charms was “bogus”. “There’s a reason Citi is trading for a fraction of its old share price and it’s not all down to the credit crisis.”


Quick impressions: Still more downside at $3.77 (the price fall simply ignored all the possible good news like 52,000 job slash cuts, Alwaleed's buy, and no bank runs on Citi's deposits yet). Since punt can go to zero, am waiting at $2 before I consider adding.

Some possible reasons why it could go to zero. Existing shareowners gets nothing as part of condition to rehabilitate Citi. Regulator actions have been shape shifting since the start of this crisis, and noone can guarantee they won't change their minds later when they realized the problem is different that what they thought.

Some possible reasons why it would not rise despite being beaten down. Citi decides to tough it out. Sell out the business processing division or credit card division. Or end up with nothing like the old Citi.

Some possible reasons why it could rise in the medium term. This is the strange part. So far, news have not yet reported exactly why Citi is in a huge problem. The share price has taken a dive (huge dive) - perhaps news will come out later.

Since we don't yet know, there is a small chance that it might be able to ride out this storm. Stress small. Mr Market is very rarely wrong. So, my own likely scenario is that Citi will be altered substantially, and existing shareowners affected big time. 80% haircut possible. So, if Citi fair value is $40, consider this to be equivalent to $8, i.e. don't look at entering at 50% of this figure. Or if target is $20, consider equivalent to be $4, i.e. don't look at entering unless it drops to $2.

Beware of averaging down. 1% capital at $8 will lose the most 1% capital, which to almost all traders is acceptable. Even to Graham as well.

Contrast 1% capital at $6, which then averaged down at $5 (1%), and then at $4 (1%), and then at $3 (1%). Average is $4.50, but has 4% capital invested. If it goes to zero, then, lost 4% capital. Borderline now whether it is acceptable or not.

Contrast 20% capital at $2. Average price is good, but if Citi goes to zero, lose all 20% capital. Can you withstand a loss of 20% capital in the worst case scenario?

Understand impact on Average Price. 1% capital at $8 can quickly go down to below $4.0 average price if averaged down at the right time and at the right price. For example, if price falls to $2, adding 2% capital will bring down the average price to $4. (1%x $8 + 2% x $2)/3% = $4.

Or 1% capital at $8 can quickly go down to $3 if add 5% capital since (1%x$8 + 5%x$2)/6% = $3. But then, have some chance that these 6% can go to zero.

So, final answer depends on your Risk/reward tolerance. A very individual thing. Remember, there is no certainty in the stock market. And "hope" is a very dangerous thing.

Friday, November 21, 2008

Low US Treasury Yields

The article is here - http://biz.yahoo.com/ap/081120/wall_street.html

The interesting paragraph to me is this - "The yield on the benchmark 10-year Treasury note sank to 3.00 percent, the lowest point since 1958. The 30-year bond's yield fell to 3.46 percent -- the lowest since the government started issuing the bond in 1977. The yield on the 2-year note, meanwhile, fell to 0.97 percent -- the lowest since 1947, according to Global Financial Data in Los Angeles."

The question now is ... when (and not if) will it get lower?

New Christmas Carol?

A friend sent me this a while ago, but I only got around to catching up my emails this morning. It brought a smile to my face, so, here's spreading it to every readers here ... Enjoy!


You'd better watch out
You'd better not cry
You'd better keep cash
I'm telling you why:
Recession is coming to town.

It's hitting you once,
It's hitting you twice
It doesn't care if you've been careful and wise
Recession is coming to town

It's worthless if you've got shares
It's worthless if you've got bonds
It's safe when you've got cash in hand
So keep cash for goodness sake, HEY

You'd better watch out
You'd better not cry
You'd better keep cash
I'm telling you why:
Recession is coming to town!

Finance products are confusing
Finance products are so vague
The banks make you bear the cost of risk
So keep out for goodness sake, OH

You'd better watch out
You'd better not cry
You'd better keep cash
I'm telling you why:
Recession is coming to town.