Sunday, November 23, 2008

Citi Meltdown

The NYT carries a story about how Citigroup has fallen down and can't get up.

It is worth reading through. It is a story largely about poor management. But there is something more, mentioned but not very clearly spelled out. We've heard a lot about subprime mortgages, CDOes and CDSes and the role these played in bringing down the financial system. In addition there is some way of moving liabilities off the accounting books, and that has to be the cause of the great fear in the market.

As per the article, on October 1, 2007, Citigroup had $43 billion of CDOs on the books. Since Citigroup had a market value of around $250 billion even if you write off 100% of the CDOs, Citigroup should have lost only one-fifth of its value. Instead, as Thomas Friedman puts it,
With $5, you can now buy one share of Citigroup and have enough left over for a bite at McDonalds.
We are told:
But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.....

....Also, hundreds of billions of dollars in dubious assets that Citigroup held off its balance sheet is now starting to be moved back onto its books, setting off yet another potential problem.

The bank has already put more than $55 billion in assets back on its balance sheet. It now says an added $122 billion of assets related to credit cards and possibly billions of dollars of other assets will probably come back on the books.
Since investors have no way of knowing what Citigroup really owns, they shun it. For all they know, it is rotten to the core.