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A mere 5.4% decline in the value of Citigroup's assets would make Citigroup insolvent.
The markets believe in Goldilocks
But the bears are out there
Buttonwood, The Economist print 7 December 2017
While the economy is improving and interest rates are low, it is hard to foresee the next downturn. As one fund manager says, investors feel like Chuck Prince, a former head of Citigroup, who was asked why the bank was still lending in mid-2007, just before the financial crisis.
“As long as the music is playing, you’ve got to get up and dance,” he said.
It is only halfway through November but I think we can already declare the winner of the 2007 Quote of the Year competition.
It is Chuck Prince, the former chairman and chief executive of Citigroup.
As Mr Prince departs, however, it should be noted that his statement was not, as history will record it, idiotic.
His offence was not that he misunderstood or misstated how banks have operated over the past few years but that he blurted out the truth rather too openly.
Note that he did not say “if” the music stops but “when”.
He recognised then – as did others – that the period of extraordinarily easy money that had prevailed since 2002 was bound to end.
John Gapper, FT November 14 2007
Citigroup, the nation's third-largest bank by assets, was on the verge of being closed by regulators the week of Nov. 24, 2008
as depositors rapidly withdrew money and the bank's counterparties declined to provide it credit, according to a government report
Huffington Post 13/1 2011
*
The report quotes Sheila Bair, chairman of the Federal Deposit Insurance Corporation, as saying that regulators “were on the verge of having to close this institution [Citi] because it can’t meet its liquidity”
Financial Times 14/1 2011
Citigroup’s crisis deepened as its shares continued to slump in spite of a planned investment
by Prince Alwaleed Bin Talal, its largest individual investor.
The 26.4 per cent fall in the shares, which closed at $4.71, prompted Citi’s directors and executives to look at strategic options, includes selling part or all of the company.
Financial Times, November 20 2008
Ytterligare nedskrivningar på nästan 9 miljarder dollar väntas nu lamslå Citigroup.
Veckans Affärer 2008-06-26
Aktien har fallit med 67 procent sedan toppen i slutet av 2006 och är 36 procent ned från årsskiftet.
Citigroup rapporterar den 18 juli
Citigroup may write down $7.1 billion of collateralized debt obligations and associated hedges, and $1.2 billion for other asset classes, Goldman said. It may need to post a $600 million loss to reflect the mark-to-market value of its own structured note liabilities, New York-based Goldman said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aXXvsTcMNBKM&refer=home
Citigroup cutting 9,000 jobs - $12bn of write-downs for sub-prime mortgages and other risky assets.
BBC 18/4 2008
Citigroup reported a steep quarterly loss and took around $13 billion in writedowns, at least half of which were related to subprime-related exposure.
However, the company's quarterly revenue was higher than analysts were expecting and
shares jumped more than 6% in the morning.
CNN 18/4 2008
Wachovia joins the list of chronic anemics along with Citigroup (C), Washington Mutual (WM), Merrill Lynch (MER) and Countrywide Financial (CFC).
That price represents a discount of more than 15 per cent to Wachovia's share price
Mish April 14, 2008
Wachovia is expected to get $US6 billion to $US7 billion (up to $7.6 billion) from selling its shares to the investors for roughly $US23-24 apiece, according to people familiar with the matter.
That price represents a discount of more than 15 per cent to Wachovia's share price on Friday.
Instead of going to shareholders exclusively, banks and Wall Street firms are looking for a third-party vote of confidence, a role that sovereign wealth funds and private equity groups have been eager to play.
While such arrangements can help reassure Wall Street that a bank is on solid footing, the deals tend to dramatically erode the value of the shares being held by investors who don't participate in the deal.
How Goldman Killed A.I.G.
WILLIAM D. COHAN, NYT February 16, 2011
The conventional wisdom has it that the final report of the Financial Crisis Inquiry Commission was a low-budget flop, hopelessly riven by internal political disputes and dissension among the commission’s 10 members. As usual, the conventional wisdom is completely wrong.
Actually, the report — and the online archive of testimony, interviews and documents that are now available — is a treasure trove of invaluable information about the causes and consequences of the Great Recession.
For instance, on the exceptionally important but little understood role played by the increasingly lower prices Goldman Sachs placed on the complex mortgage securities on its balance sheet — which helped determine the fate of many of its shakier Wall Street brethren — the commission report, on page 237, is crystalline:
The first victims of Goldman’s decision in May 2007 to begin communicating its lower marks to the rest of the marketplace were the two Bear Stearns hedge funds that were heavily invested in complex and squirrelly mortgage securities.
Soon enough, the funds’ investors were blocked from withdrawing their money, and by July the funds filed for bankruptcy and were soon liquidated. Investors lost much of the $1.5 billion they had invested. The liquidation of the two hedge funds led to the collapse of Bear Stearns nine months later.
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Did Goldman Sachs Kill AIG ?
The Big Picture February 17th, 2011
I have to take issue with William Cohan’s Op-Ed, How Goldman Killed A.I.G.
First off, let me start out by saying that these are two bad actors; there are no “good guys” here. Second, let me remind the reader that AIG under-wrote $3 trillion worth of derivatives, a massive high-risk exposure — and collected $3 billion (10 bps) in fees on their exposure.
Tom Savage, President, the head of AIG’s Financial Products, it free money: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”
Gee, how could that go bad?
Anyone who believes that stabilising Lehman was financially or politically impossible should note that the US Treasury bailed out the insurance group AIG at far greater public expense 24 hours later, when AIG’s potential failure threatened the survival of J.P. Morgan and Goldman Sachs.
Anatole Kaletsky, The Times, September 18, 2009
The U.S. government rescued giant insurer American International Group
in part because its collapse would dramatically hurt European banks
CNBC 06 Mar 2009
Pennsylvania Rep. Paul Kanjorski told reporters after his subcommittee held a hearing on systemic risk.
Later, in an interview with Reuters, Kanjorski said he was told that a large number of AIG's counterparties were European.
"That's why we could not allow AIG to fail as we allowed Lehman (Brothers) to fail, because that would have precipitated the failure of the European banking system," he said.
AIG is to receive a new $150bn US government bail-out
that will allow the troubled insurer to reduce interest payments and give it more time to sell assets and save itself from collapse.
Financial Times, November 9 2008
U.S. will take 80% stake in nation's largest insurer to prevent global financial chaos.
CNNMoney September 17, 2008
Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries.
Shares of American International Group fell sharply after reports that the insurer had turned to the Federal Reserve for $40 billion in bridge financing to ward off a liquidity crisis and ratings downgrades.
CNBC 15 Sep 2008
AIG shares have fallen about 80 percent since the start of the year.
AIG offered investors an 8.25% yield for $3.25 billion of 10-year notes, and
Citi offered 6.5% for $3 billion of five-year notes.
CNN 18/8 2008
But even before Monday's raft of bad news, there were worrisome signs in the financial sector. Financial giants such as American Express (AXP, Fortune 500), Citi (C, Fortune 500) and AIG have lately paid big premiums to raise billions of new cash in the bond market.
Those yields are substantially above the rates the companies paid earlier this year, reflecting continued uncertainty about the firms' finances after tens of billions of dollars in writedowns.
While the Fed has cut the short-term Federal funds rate that it controls to 2% from 5.25% since September, rates on long-term mortgages have risen.
HSH Associates says fixed-rate 30-year mortgages cost 6.70% in early August, up from 6.47% when the Fed first cut rates.
Allan Sloan, senior editor CNN, August 18, 2008
If Citigroup could have borrowed reserves from the Fed at 3-4%
wouldn't it had done so instead of raising $7.5 billion from Abu Dhabi
at an interest rates of 11%?
Reuters is reporting Dozens of U.S. banks will fail by 2010.
Mish 9/2 2008
Citigroup makes $49bn SIV rescue
will take control of seven investment funds worth $49bn
BBC, 14 December 2007, with good links, as usual
Full text
Conduits or structured investment vehicles (SIVs) and Disintermediation
Början på sidan - Top of page
Counting the funds Kuwait and Korea committed to Merrill and Singapore and Kuwait committed to Citi,
sovereign funds have provided US and European banks about $42b in new capital over the past two quarters.
Brad Setser, Feb 04, 2008
That tops the $30b the IMF lent out over a four quarter period in the Asian/Russian crisis of 1997-1998, and is roughly the same size as the $40b or so the IMF lend out to Argentina, Brazil, Turkey and Uruguay over a two year period in 2001-2002.
Citigroup is going to get a cash injection of $6.88bn from Singapore government investment agency GIC.
BBC 15/1 2008
Citigroup suffers $9.8 billion loss
CNN January 15 2008
The financial giant also announced a writedown of $18.1 billion related to soured mortgage investments and major cost-cutting initiatives, including a 41 percent cut to its dividend and plans to reduce in its payroll. At the same time, it said it was receiving a $12.5 billion infusion from investors in Kuwait, Singapore and the state of New Jersey.
This follows a similar $7.5bn investment in Citigroup from another government agency, the Abu Dhabi Investment Authority, last November.
Citigroup has slashed the size of its struggling off-balance-sheet investment funds by more than $15bn in two months
SIVs sell cheap, short-term debt to invest in higher-yielding, longer term assets
FT 10/12 2007
Meredith Whitney shuts her hedge fund
Ms. Whitney first gained star status in October 2007, when as a little-known research analyst at Oppenheimer & Co.
she made a well-timed bearish prediction on Citigroup
The bank’s stock tumbled days later and then-Chief Executive Charles Prince swiftly resigned.
MarketWatch June 11, 2015
Hailed as an oracle of the larger financial crisis that followed in 2008, she became ubiquitous on business television and
resigned from Oppenheimer in February 2009 to start her own research firm.
CIBC World Markets financial services analyst Meredith Whitney,
whose vociferous comments on Citigroup triggered a $369bn fall in world equity markets and prompted Citigroup chairman and chief executive Charles “Chuck” Prince to resign earlier this month,
said the new investment was “not enough, and certainly too late”.
Daily Telegraph 29/11 2007
“They’re desperate,” said Ms Whitney. “This $7.5bn is just not enough money by a long shot.” She believes that the odds that the bank, the world’s largest by assets, will still cut its dividend are “100pc”, while adding that the company may be forced to sell more than $100bn of higher quality assets at a discount in order to raise cash.
Citi shares rise on $7.5bn capital injection
at a coupon of 11 per cent from the Abu Dhabi Investment Authority
FT November 27 2007
The high cost of the new funds highlights Citi’s determination to meet its commitments to strengthen its balance sheet and carry on investing while maintaining its dividend.
It is only halfway through November but I think we can already declare the winner of the 2007 Quote of the Year competition.
It is Chuck Prince, the former chairman and chief executive of Citigroup.
As Mr Prince departs, however, it should be noted that his statement was not, as history will record it, idiotic.
His offence was not that he misunderstood or misstated how banks have operated over the past few years but that he blurted out the truth rather too openly.
Note that he did not say “if” the music stops but “when”.
He recognised then – as did others – that the period of extraordinarily easy money that had prevailed since 2002 was bound to end.
John Gapper, FT November 14 2007
That brings us to the crux of Mr Prince’s remark: “As long as the music is playing, you’ve got to get up and dance.”
In other words, as long as conditions in financial markets are alluring, banks have no choice but to plunge in – even if they realise that dangers lie ahead.
It is worth reflecting soberly on this point because Mr Prince was not a renegade. He was doing his best to express, a bit too plainly as it turned out, the strategy pursued by Citi and its Wall Street rivals.
The phenomenon was at work in 1998 when Wall Street trading desks lined up with the trades devised by Long-Term Capital Management, the hedge fund. After the Russian debt crisis, buy-orders dried up in all corners of markets at once and Long-Term Capital collapsed.
The industry’s tendency to succumb to the madness of crowds invalidates a lot of risk management models, which under-estimated the probability and size of losses in highly stressed markets, as they did in 1998.
...
Dance (While The Music Still Goes On) - Abba
...
Bankers, like gangs, just get carried away
“So long as the music is playing, you’ve got to keep dancing. We’re still dancing.”
Chuck Prince, former chairman and chief executive of Citigroup, was interviewed by this paper only a month before the music stopped.
A few weeks later he was out of a job.
With these comments, he got to the heart of the banking crisis.
John Kay, FT February 12 2008 18:15
Will ha dance anymore?
Charles Prince, the chairman and chief executive of one of the world's biggest banks, Citigroup, has resigned.
He will be replaced as chairman by former US Treasury Secretary Robert Rubin
BBC 5/11 2007
Bankers had cashed in before the music stopped
In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively
Lucian Bebchuk, Alma Cohen and Holger Spamann FT December 6 2009
”När musiken tystnar – en rapport om den globala finanskrisen”.
beskriver krisens förlopp och orsaker, men anger också vilka principer som bör gälla för en ny regleringsmodell.
Ola Pettersson, LO-ekonom 2009-06-10
A mere 5.4% decline in the value of Citigroup's assets would make Citigroup insolvent.
Michael Shedlock, November 01, 2007
"These numbers indicate that this bank is both liquid and well-capitalized," Bove wrote.
"At the end of the third quarter, Citigroup posted $2.355 trillion in assets. This was more than any other American bank and possibly more than any bank in the world."
Notice how Bove cleverly pointed out the asset side of the equation while conveniently forgetting about liabilities.
Let's rework Bove's statement to see the other side of the story.
"At the end of the third quarter, Citigroup posted $2.227 trillion in liabilities. This was more than any other American bank and possibly more than any bank in the world.
A mere 5.4% decline in the value of Citigroup's assets would make Citigroup insolvent."
Citigroup's assets look great in a vacuum. However, those assets do not look so great in relation to liabilities.
Leverage has never been greater, and much of that leverage is now in exactly the wrong places: residential and commercial real estate.
Citigroup CEO Chuck Prince's next "dance step" is likely to be out the door.
Citigroup’s Chuck Prince was a dancer. Not by profession mind you, or even as an amateur Foxtrotter with the Stars on ABC.
Prince danced with subprime mortgages and the financial conduits that contained them.
“As long as the music is playing,” he foreswore in early July, “you’ve got to get up and dance. We’re still dancing.”
Prince’s observation may not top that of Irving Fisher in 1929 who proclaimed a permanently higher plateau for the stock market,
but it will suffice for a generation of modern day investors and their iconic leaders who should have known when to exit the floor. He – they – dance no more with their subprime partners.
Still, someone had to be the last to know that the music was over and to be caught when Jim Morrison’s proverbial lights were dimming, if not flickering out.
And to be fair, there were millions of dancing investors still on that floor when the unravelling of Bear Stearns’ hedge funds gave the party its first hint that this was going to be the last dance.
Many of the biggest players in the debt market are reluctant to express their worries in public but privately admit to deep concern. The chief risk officer at a leading Wall Street firm says banks are being forced to lend on aggressive terms to "stay in the game", even though they know trouble is being stored up. "It's like a game of musical chairs.
You just hope it is somebody else that gets hurt when the music stops."
Financial Times 14/3 2005
What we saw this summer is something we've seen before and will undoubtedly see again. The sell-off was predictable and avoidable.
Some people were apparently shocked to learn that gambling was occurring at Rick's Cabaret.
Speech by Michael E. Lewitt, made at the The Bank Credit Analyst Conference
Mauldin's Outside The Box 2007-11-05
So what will happen "when the music stops", as Mr Roach puts it.
Worryingly, the first session to be oversubscribed in Davos was entitled: "Spotting the next bubble before it bursts".
BBC 27/1 2005