Sunday, December 23, 2007

A Bank that couldn't say No

Let’s take Citigroup and look at their balance sheet. Two trillion in assets, these are customer deposits. The bank has about 127 billion worth of equity (book value $25.479 times the number of shares 4.98 Billion). Don’t confuse this with “market cap” which is the number of shares times the current stock price (152.92 Billion). Market cap could go to a dollar and it would not affect the book value of the company. As a stockholder you could end up with zip. If you hold preferred stock, you are ahead of widows and orphans. Abu Dhabi has preferred stock.

In order to pay a reasonable interest rate, the money has to be invested in some vehicle that has a decent return. It’s a good assumption the bank didn’t invest the 1.9 trillion in Treasury bills or other government bonds; the return is just not there. In three months time, Citigroup has come up with a write-down of bad investments with a total somewhere between 72 billion to 100 billion dollars (see Deutsche Bank spread sheet).These are real estate SIV’s and CDO’s. What happens if we move out another four months? Citigroup’s fiscal year ends in December. How liquid are their assets? The answer to that question is a little like taking a laxative to cure diarrhea. If you think it’s bad now, wait a while.

---Courtesy Deutsche Bank November 11, 2007. Double click for larger image

What did Citigroup invest the rest in? If it wasn’t “invested” in real estate, then where did they put it? Credit card loans or how about hedge funds, both are "real money makers." What ever it is, it is probably not easily convertible to cash.

Can a bank have 100 billion in losses and still be functional? There hasn’t been a peep from Federal regulators. It seems a little like the Donald Trump wing ding of several years back. If the banks had foreclosed on him they would have gotten very little. Instead they loaned him more money and rewrote his loans.

Are the Federal Bank examiners checking the books? They had a rough time with the 125 billion dollar Savings and Loan bailout of the 1990’s. Citigroup is BIG and we are only talking one bank. A bank in trouble is like spotting one cockroach, you know there has to be more.

The amount of money involved in losses is staggering. The amount of money this one bank controls is beyond comprehension. Am I the only one that thinks this needs to be examined more closely? Have I mistakenly reported billions when they actually meant millions? No, the figures are real and big.

Just examine the Federal Reserve handing out banking reserves, without naming names (to keep banks from being embarrassed???) at emergency auctions? We could be looking at money leaving the banks at a rate faster than they can liquidate assets. "Emergency auctions" sounds like “Man the Lifeboats.”

The banking crisis is a little like the Hindenburg. It could go from something to nothing real fast. The only trouble is, who owns the something that's about to become nothing.


Tom said...

Merry X-Mas & Happy (???) New Year Jim,

Always looking forward to your next post, this one without exception…

I’m sure over the next year or so, there will be many parallels made to the late 20’s & early 30’s as the financial systems collapse around us and the nasty ‘R’ word rapidly turns to ‘D’ word. I must say that our say that one thing the government (State Department, politicians, etc) is executing flawlessly through the free (???) press is the cover-up of how bad things really are.

As I believe most Americans are out-of-touch with their surroundings and reality, what do you think will be the straw which will kick off the five stages of the Loss Process for the masses (Denial, Bargaining, Anger, Despair, and Acceptance)? For the last two years, 98% are still in the first phase. As long as the government can keep the topic out of the media I believe losses will be kept to individuals and mass will believe everything is OK.

Let me rephrase… What do you think will be the most significant event that most will consider as the $#!T that hit the fan?


Jim in San Marcos said...

Hi Tom

Merry Christmas and Happy New Year to you.

I would bet that 95 percent of everyone hasn't got a clue to what is going on. They have no real life experience to compare it to.

The whole thing boils down to confidence in the system. Right now it is being severely questioned. Banking is a faith issue. Destroy faith and the banks are toast. I think that the government realizes this issue and is following through. The only problem I see is that I don't think that the Banks are being up front with the government. Its worse than they are letting on.

As for what will be the trigger, is hard to say. A stock market collapse would be a "game over" indicator. No way of telling if history will repeat itself like 1929


I go with Jim. I feel we're in some horrible disorganised fantasy and even the experts have little idea where it could all go.