Monday, November 24, 2008

On the Citi Bailout

From the rapid 50% runup in Citi's stock price when the market opened today, followed by an absolutely flat stock price for the rest of the day on more than five times the usual volume, I infer that either everyone buying and selling Citi common is using exactly the same model to value the post-bailout Citi, or there is some form of support out there.


Also there are some material differences between the Term Sheet for the Citi bailout and the press announcement http://www.theconglomerate.org/2008/11/the-citi-deal-l.html .

First, about the "Term Sheet". Two pages of large type? This isn't a real Term Sheet.

Second, according to the press release, "Eligible Assets" include "$306 billion of loans and securities backed by residential and commercial real estate and other such assets" but the Term Sheet seems not to limit the bailout to "other such assets"; the Term Sheet says simply "other assets the U.S. Government (USG) has agreed to guarantee"... a pretty big loophole. Credit card debt anyone? New bonds?

Third, in the same paragraph the wording says"each specific asset must be identified on signing of guarantee agreement."; singular "asset" and no article ("an" "the"). Very odd wording. We will not know how much of the "up to" $306 assets and how many of the guarantee contracts there are for weeks, or probably the Obama administration.

Fourth, in the Term Sheet under "Deductible", Citi takes the first $29 Billion loss (plus the reserves I think); then the Treasury takes 90% of the next $5.5 Billion; finally the FDIC takes 90% of another $11 Billion. Then, according to the press release, "In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan." But the Term Sheet says " Federal Reserve funds remaining pool of assets with a non-recourse loan, subject to the institution's 10% loss sharing...", which opens up a whole host of questions about how the loan and the assets will be carried on the Fed's books and what they mean by "the pool" (singular). More odd wording. Also, will there be a real loan or will the Fed. simply "stand ready", which makes the guarantee eerily like the one given to Fannie and Freddie bonds, a guarantee that the market clearly doesn't believe.

How do the loan (if it happens), the existing loss reserves, and the 10% now get accounted for on Citi's books?

Finally, should we begin to treat the Federal Reserve like one of AIG or Citi's SIVs? A method of allowing liability to sit off books- for a while?

Tuesday, November 11, 2008

Are the Treasury loans to Banks backed by Commercial Paper or the Banks' Credit Card Receivables?


The claim is that the banks are not lending out the bailout money.  But they are.  All the credit card debt-backed 30-60 day paper usually packaged and sold and all the Sallie May loans usually bundled sold are now  stuck on the banks'  books.

With Christmas coming and consumer confidence in the tank, the U.S. government is rightly trying to keep the ball rolling.  .  Two weeks ago it was reported that credit card debt had gone up 1.9% in one week, or a rate of 100%/yr.  Such rapid growth of credit card use at a time like this hints at truly desperate people.  These credit card debts will have a very high default rate, but cutting off the borrowers, which is what the banks should rationally do, is an impossibility, as is a sudden cutoff of the student loans flows.

If my analysis is correct, this might explain the Treasury's unwillingness to release details of the commercial paper taken as security from the banks and also the sudden conversion of  AMEX into a bank; it can now  turn the American Express card receivables into paper, pledge the paper for Treasury loans and keep issuing more credit.   With AMEX included, the list of banks up for loans now precisely matches the list of the largest credit card issuers. 

At a time like this the banks would not allow a new  wave of probably low-grade borrowing without some sort of implicit government guarantee, which hints at more Treasury borrowing down the road, awhile the extraordinary secrecy about the nature of the commercial paper backing the banks' Treasury loans hints at real fear about how the markets would react. If the scale is as large as I suspect, then real consumer spending (by rational consumers who will be able to pay for what they purchase) is even weaker that we thought.  

I'd like to see a response from someone who knows the scale and quality issues associated with the credit card commercial paper rollovers and the Sallie May debt numbers.

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