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Monday, November 24, 2008


citi bailed for now

a smallish package for a bank with immense problems. citi stock is priced as an option and is predictably much higher, but for how long?

as david merkel notes, the problems are not going away and as the other TBTF banks come calling it will present a stress test of the credit of the american government. but in the shorter term -- citi is carrying about $3.3tn in assets on and off their balance sheet. what is $20bn in preferred to that? indeed, what is loss mitigation on $300bn of assets to that? this looks to me a bandage built to buy time for a bank circling the drain, not the surgery and recovery needed to heal the patient.

that opens a line of speculation. if citi won't be allowed to fail, why isn't the deal enough to put its safety beyond doubt? there are several possible reasons, but i'd sadly suspect first that it is because the government is in a bit of denial, still does not comprehend the seriousness of what is happening and just how many multiples of its capital citi has frittered away. and it is probably getting plenty of help in that delusion from citi itself, whose executives have unfortunately demonstrated either their lack of comprehension or the depth of their malevolent predatory drive from the start.

UPDATE: i see i'm not alone in that assessment.

UPDATE: in john hempton's note on a citi prepack bankruptcy -- which is centered on a painful but ultimately necessary debt-to-equity conversion -- he included a liquidity provision that looks much like what the government has done here. citi will be able to repo the guaranteed assets with the fed, increasing its ability to stay afloat. but this again is testament to the view of this crisis as one of liquidity and not solvency -- in other words, it adds weight to the idea that the government doesn't get it, or is at least merely kicking the can down the road.

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