Privatizing resources seen as "solution": Global Research.ca

Roads, airports on the block as budgets tighten

Fri Aug 1, 2008 12:37pm EDT

By Jonathan Stempel

NEW YORK (Reuters) - Cash-strapped U.S. state and city governments are likely to sell or lease more highways, bridges, airports and other assets to investors desperate for stable returns after being frazzled by the credit crisis.

The trend is set to pick up speed given worsening budget deficits in state capitals and city halls nationwide.

It will also be welcomed by Wall Street bankers hoping to help create and market so-called "infrastructure" transactions at a time many debt markets remain paralyzed, and after major U.S. stock indexes fell into bear market territory.

"When you are nervous about everything else, you put your money in a toll road,"

said John Schmidt, a partner at the law firm Mayer Brown LLP in Chicago.

"That's the logic of infrastructure. Returns are stable and predictable. You won't get fabulously rich, but you'll get stable cash flow."

The latest enthusiasm for at least partially privatizing infrastructure assets came on July 30 from New York Gov. David Paterson, who is trying to plug a budget deficit caused in part by lower tax revenue as Wall Street retrenches.

"We're just looking at ways to be more efficient and that's why I used the term public-private partnerships -- trying to find some creative solutions,"

Paterson said.

"The reason I'm avoiding taxes is because I think taxes are addictive."

Bankers and others in the industry say there is pent-up demand from dedicated infrastructure funds and public pension funds to invest in hard assets -- perhaps $75 billion to $150 billion of equity capital -- but not enough supply.

"Economic conditions are tough, and are going to be very harsh on the performance of state budgets in 2008 and 2009," said Greg Carey, co-head of infrastructure banking at Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz). "States are looking for long-term solutions in running businesses. A public-private partnership is a tool in their toolboxes."

A high-water mark came in May, when a group led by Spain's Abertis Infraestructuras SA (ABE.MC: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) agreed to pay $12.8 billion to lease the Pennsylvania Turnpike for 75 years. The total could reach $18.3 billion, including promised improvements. Legislators must approve the lease.

Other transactions have included the $1.8 billion lease of the Chicago Skyway toll road bridge in 2005, and a $3.8 billion lease of the Indiana Toll Road the next year. Chicago Mayor Richard Daley is preparing to lease Midway Airport this year.

For Wall Street, infrastructure can be a bright spot at a time of deep job cuts and expected declines in bonuses.

"We've seen an unprecedented number of headhunters recruiting for positions on the buy and sell sides," said Rob Collins, head of Americas infrastructure banking at Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz). "Infrastructure investing can be counter-cyclical to economic trends."

John Ma, the other Goldman infrastructure chief, added: "We're very committed to this space. Our business activity has increased dramatically, even this year."

ALTERNATIVE TO TAX HIKES

According to the nonprofit Center on Budget and Policy Priorities, 29 U.S. states plus the District of Columbia may face a combined $48 billion of budget deficits in fiscal 2009.

But politicians might be loathe to cut spending or raise taxes at a time mortgage debt, $4-a-gallon gas and rising food prices leave consumers -- of whom many vote -- dispirited. Tapping public debt markets might also be too costly.

Meanwhile the American Society of Civil Engineers estimates $1.6 trillion is needed over five years to raise the often aged U.S. infrastructure to "good" condition.

Pennsylvania Gov. Ed Rendell in July called for the United States to establish a capital budget to pay for such repairs. It was a year ago August 1 that the Interstate 35W bridge in Minneapolis plunged into the Mississippi River, killing 13.

Critics say some infrastructure transactions are short-term budget fixes that deprive governments of steady cash streams from taxpayer-funded assets. There is also the risk that private operators won't do their jobs well.

Advocates of privatization say entities might do better managing assets than a government answering to voters.

Politicians could also get a boost if they can take credit for reinvesting sale or lease proceeds in needed projects.

"The argument for a public-private partnership is the private sector is a lot smarter about paying attention to costs, and because it has skin in the game will be more attentive to maintaining an asset over its life," said Joseph Giglio, a privatization expert and professor at Northeastern University's College of Business Administration in Boston.

"Elected officials often shortchange funding of maintenance because they don't want to increase user fees or taxes to pay for it," Giglio added. "Their election cycle is four years. They can pass it on to someone else's watch."

Collins, who also advised Pennsylvania on the turnpike, said infrastructure can also go beyond roads and airports. He said Morgan Stanley is advising Akron, Ohio, on exploring the leasing of its wastewater system, and Indiana on the possibility of private management for its state lottery.

"Lotteries have infrastructure characteristics in that they have stable cash flows and high barriers to entry," he said. "They could even attract private equity investment because they are self-financeable and require minimal capital expenses."

BIG NAMES

At Goldman, Carey and Ma replaced Mark Florian, who is moving to First Reserve Corp, a private equity firm specializing in energy, a person close to the matter said.

Goldman itself raised a $6.5 billion infrastructure fund in 2006, and is reportedly trying to raise a $7.5 billion fund.

Morgan Stanley raised a $4 billion fund in May. Global Infrastructure Partners, a joint venture between Credit Suisse Group AG (CSGN.VX: Quote, Profile, Research, Stock Buzz) and General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), raised a $5.6 billion fund the same month. Private equity firm Carlyle Group CYL.UL last year raised a $1.15 billion fund.

And Kohlberg Kravis Roberts & Co KKR.UL, which is preparing to go public, in May lured George Bilicic from Lazard Ltd (LAZ.N: Quote, Profile, Research, Stock Buzz), where he led power, energy and infrastructure efforts worldwide, to run its own infrastructure investments.

Two of the largest specialists in the area are Australian: Macquarie Group Ltd (MQG.AX: Quote, Profile, Research, Stock Buzz) and Babcock & Brown Ltd (BNB.AX: Quote, Profile, Research, Stock Buzz).

Schmidt, the Mayer Brown partner, said if the Midway transaction succeeds, other airports could also go private, perhaps leading to "lower and more predictable landing fees and terminal rentals for airlines, which certainly aren't flush."

That, he said, could bring the value of roads, bridges and airports that could be privatized to half a trillion dollars.

(Additional reporting by Joan Gralla in New York and Elizabeth Flood Morrow in Albany, New York, editing by Dave Zimmerman)

more on the fiscal crisis .. what 'insiders" are reading

Here's a little more eavesdropping on those who still have ca$h as the fi$cal cri$i$ continues.

Too bad they can't figure out that the US war debt is what is really killing them all.

Market regulation was the last thing the NEOCONS wanted, and was the last thing that was going to be seen . . and so it is. The entire world gets to suffer from the Neocons greed and lack of "ethics". And it just AMAZES me that they think Hank Paulson and Michael Mukasey are going to lift one little finger to get the Big Crook$ any kind of punishment.

That task, dear reader, falls to us - and it's called IMPEACHMENT.

The arms trading, the defense industry, the influence peddling - all has made for a very bad business enviroment.

Notice how you never hear of an armaments manufactuter with defense contracts having a Very Bad Time?

Well, have you?

The below is from a blog called urban digs, put out by Noah Rosenblatt.

Veeger

When Meredith Talks, We Must Listen; Regulation Strangles

Posted by Noah Rosenblatt on March 26, 2008 at 11.00 AM

A: Why? Because she was dead on BEFORE any other analysts were! Meredith Whitney had the courage to say what others wouldn't and put out a research note warning of the writedowns and dividend cuts months before they occurred. Today, Whitney quadruples the loss estimates for Citigroup which comes one day after Goldman Sachs puts the total global subprime loss projection at 1.2 Trillion before all is set and done.

Back in late October, Whitney put out a research note on Citigroup; story via Forbes.com:

Citigroup (NYSE: C) dropped 7.5%, or $3.11, to $38.25 on Thursday morning after CIBC World Markets downgraded the stock on fears of an impending dividend cut.

In a research note, CIBC World Markets analyst Meredith Whitney downgraded Citigroup to "sector underperformer" from "sector performer," saying that a dividend cut may be on the horizon in order for the company to raise capital.

Hmm, Citigroup falling 7.5% to $38; seems like ancient history these days. So where is Whitney NOW after the entire financial sector has gotten beaten down? Well for Citigroup, she is revising her loss estimates up four fold!

According to Bloomberg's article, "Citigroup Estimates Cut by Oppenheimer's Whitney":

Citigroup fell 3.3 percent in Frankfurt trading to $22.65 after Whitney predicted the bank will lose $1.15 a share in the quarter because of potential markdowns of $13.1 billion on assets including leveraged loans and collateralized debt obligations. That compares with her earlier loss estimate of 28 cents, Whitney wrote in a note yesterday to investors.

This comes one day after teflon IB Goldman Sachs sees total credit losses around the globe reaching as high as $1.2 trillion; and $460 billion for US levered institutions.

According to the story via Reuters:

Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40 percent of the losses.

U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday.

Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements, they said.

Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer. "U.S. leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble," they said. "There is light at the end of the tunnel, but it is still rather dim."

We had our one week drug induced rally after the fed cut FFR & discount window and helped avoid a systemic financial meltdown by backing up a JPM buyout of Bear Stearns. The drugs are starting to wear off, and as usual, talk is now starting about the NEXT round of rate cuts. Oh when will the story end!

If there is one thing to take from what Whitney & Goldman is saying, its that we STILL don't know how deep this writedown abyss goes! I certainly have no clue how deep the hole goes, all I know is that it continues to be deeper than most like to admit. We are about to enter a period where more writedowns will come at the same time economic data shows the effects of the credit storm; after all the fed admitted that unemployment & inflation will rise as the economy slows. We saw today's weaker durable goods number and now we must brace for unemployment data and Q4 final GDP and Q1 advanced GDP that could very well mark the official recession call.

Profit potential at investment banks need to get adjusted as the game is over for many revenue generating models:

The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years?

When the fed does what they are doing, you know regulation isn't far behind! While that is good for longer term sustainable growth without allowing for the same mistakes that were made in past few years, it will strangle profit potential.

In my view, future rate cuts will tell us how severe the recession will be. I would expect at least another 50-75 bps of cuts to the FFR over the near term, further weakening our dollar and boosting commodity prices. I hope that additional stimulus measures will limit the aggressiveness of future rate cuts. Should the fed cut more than this, or take the FFR below 1.5% or so, that is an indication that the recession is proving to be worse than original thought. How low will we go?

Banking dossier: Citigroup's 2008 losses equal that of all Indian banks

MUMBAI/NEW YORK: It's probably the price of being the largest that in the ongoing slump across global bourses, the market value lost by the world's biggest bank Citigroup, run by India-born Vikram Pandit, so far in 2008 is equal to the loss suffered by all the Indian banks together.

But, despite this huge loss of close to 43 billion dollars, the US banking behemoth is still valued more than all the Indian banks taken together.

The market capitalisation of Citigroup has dropped by 26.63 per cent since the beginning of the current calendar year, making it the worst performer among the top 30 blue-chips in the US that constitute the benchmark Dow Jones Industrial Average (DJIA) index in the American equity market.

The percentage loss in Citigroup's market cap is lower than that of Bombay Stock Exchange's banking sector index Bankex as well as a number of Indian banks in the same period. However, owing to the larger market value of the US banking giant, the absolute loss is equivalent to the collective loss sufferred by all the 18 banks present on the BSE Bankex index.

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Citigroup, which has been among the worst affected from the US subprime crisis, has seen its market value getting eroded by close to 43 billion dollars since the beginning of the current year. A similar loss has been recorded by the 18 Indian banks during the same period.

While Citigroup's market value has dropped from about 161 billion dollars at the end of 2007 to 118 billion dollars at present, that of the 18 Bankex companies has dropped from about Rs 5,35,960 crore (136 billion dollars) to close to Rs 3,64,522 crore.

Banking Dossier: Eliot Spitzer and the subprime prosution: Greg Palast

Eliot’s Mess

Published March 14th, 2008 in Articles, Podcasts

The $200 billion bail-out for predator banks and Spitzer charges are intimately linked

By Greg Palast
Reporting for Air America Radio’s Clout

March 14th, 2008

[To hear it, click on the link below…]

While New York Governor Eliot Spitzer was paying an ‘escort’ $4,300 in a hotel room in Washington, just down the road, George Bush’s new Federal Reserve Board Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with mortgage bank industry speculators.

Both acts were wanton, wicked and lewd. But there’s a BIG difference. The Governor was using his own checkbook. Bush’s man Bernanke was using ours.

This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.

Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.

How? Follow the money.

The press has swallowed Wall Street’s line that millions of US families are about to lose their homes because they bought homes they couldn’t afford or took loans too big for their wallets. Ba-LON-ey. That’s blaming the victim.

Here’s what happened. Since the Bush regime came to power, a new species of loan became the norm, the ‘sub-prime’ mortgage and its variants including loans with teeny “introductory” interest rates. From out of nowhere, a company called ‘Countrywide’ became America’s top mortgage lender, accounting for one in five home loans, a large chunk of these ‘sub-prime.’

Here’s how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 monthly payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain’t worth a can of spam and the Grinnings are told to scram - because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the “discount” they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. The Grinnings move into their Toyota.

Now, what kind of American is ‘sub-prime.’ Guess. No peeking.

Here’s a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites.

Dark-skinned borrowers aren’t stupid – they had no choice. They were ‘steered’ as it’s called in the mortgage sharking business.

‘Steering,’ sub-prime loans with usurious kickers, fake inducements to over-borrow, called ‘fraudulent conveyance’ or ‘predatory lending’ under US law, were almost completely forbidden in the olden days (Clinton Administration and earlier) by federal regulators and state laws as nothing more than fancy loan-sharking.

But when the Bush regime took over, Countrywide and its banking brethren were told to party hearty – it was OK now to steer’m, fake’m, charge’m and take’m.

But there was this annoying party-pooper. The Attorney General of New York, Eliot Spitzer, who sued these guys to a fare-thee-well. Or tried to.

Instead of regulating the banks that had run amok, Bush’s regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of “federal pre-emption,” Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer’s investigation of ugly racial mortgage steering. Bush’s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup’s Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called “securitization.”

What that means is that they took a bunch of junk mortgages, like the Grinning’s, loans about to go down the toilet and re-packaged them into “tranches” of bonds which were stamped “AAA” - top grade - by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to US school district pension funds and town governments in Finland (really).

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide’s top man, Angelo Mozilo, will ‘earn’ a $77 million buy-out bonus this year on top of the $656 million - over half a billion dollars – he pulled in from 1998 through 2007.

But there were rumblings that the party would soon be over. Angry regulators, burned investors and the weight of millions of homes about to be boarded up were causing the sharks to sink. Countrywide’s stock was down 50%, and Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest share blocks.

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That’s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure – and got to keep the Grinning’s house. There was no ‘quid’ of a foreclosure moratorium for the ‘pro quo’ of public bailout. Not one family was saved – but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo’s Countrywide stock rose 17% in one day. The Citi sheiks saw their company’s stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided – what a coinkydink! – the man called, ‘The Sheriff of Wall Street’ was cuffed. Spitzer was silenced.

Do I believe the banks called Justice and said, “Take him down today!” Naw, that’s not how the system works. But the big players knew that unless Spitzer was taken out, he would create enough ruckus to spoil the party. Headlines in the financial press – one was “Wall Street Declares War on Spitzer” - made clear to Bush’s enforcers at Justice who their number one target should be. And it wasn’t Bin Laden.

It was the night of February 13 when Spitzer made the bone-headed choice to order take-out in his Washington Hotel room. He had just finished signing these words for the Washington Post about predatory loans:

“Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.”

Bush, Spitzer said right in the headline, was the “Predator Lenders’ Partner in Crime.” The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington to launch a campaign to take on the Bush regime and the biggest financial powers on the planet.

Spitzer wrote, “When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners the Bush administration will not be judged favorably.”

But now, the Administration can rest assured that this love story – of Bush and his bankers - will not be told by history at all – now that the Sheriff of Wall Street has fallen on his own gun.

A note on “Prosecutorial Indiscretion.”

Back in the day when I was an investigator of racketeers for government, the federal prosecutor I was assisting was deciding whether to launch a case based on his negotiations for airtime with 60 Minutes. I’m not allowed to tell you the prosecutor’s name, but I want to mention he was recently seen shouting, “Florida is Rudi country! Florida is Rudi country!”

Not all crimes lead to federal bust or even public exposure. It’s up to something called “prosecutorial discretion.”

Funny thing, this ‘discretion.’ For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him in diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.

Naming and shaming and ruining Spitzer – rarely done in these cases - was made at the ‘discretion’ of Bush’s Justice Department.

Or maybe we should say, ‘indiscretion.’

************
Greg Palast, former investigator of financial fraud, is the author of the New York Times bestsellers Armed Madhouse and The Best Democracy Money Can Buy.

Hear The Palast Report weekly on Air America Radio’s Clout.

And next Wednesday March 19, join Palast and Clout host Richard Greene on a dinner cruise on the Potomac River. For more information click here.

And this Sunday, at noon, on WABC-TV New York, catch Amy Goodman, Les Payne and Greg Palast on Like It Is with Gil Noble.

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Citi getting $12.5 billion in new capital: marketwatch

By Greg Morcroft

said Tuesday that it is raising $12.5 billion in new capital from a private placement and public offering of preferred shares, as well as cutting its dividend.

It is getting $6.90 billion from the private placement, which includes investment from several outside investors including the Government of Singapore Investment Corporation Pte Ltd (GIC), Capital Research Global Investors and former chairman and CEO Sandy Weill and his family.

The firm is also selling $2 billion of preferreds to the public.

The investments will bolster Citi's balance sheet and help maintain regulatory capital levels after huge writedowns from soured mortgage investments and bad loans.

Citi, the nation's largest bank based on assets, earlier reported a loss of $9.8 billion and cut its dividend 40%.

Worth noting: Citicorp, and shuffling chairs on the Titanic

Due to this information below, given to you, don't act surprised as others will, when it suddenly merges with another bank! Banks will be increasingly go "global" as they struggle to find other currencies to keep the "liquid".

Ratings agencies are lowering their estimates of what the SIVs are worth (Citicorp 60%), but they are flying by by the seat of their pants trying to figure out just how much debt to write down when doing an assessment(s). While it seems "easier", no one ends up any closer to the TRUTH; the real assets ledger goes begging and the Enron-style accounting practices just continues. You either you know or you don't. Granted, the values of what bank holdings actually are is far less than what anyone's been told, but this guesstimate's business is part and parcel of the whole problem with lack of regulation of all sectors in the financial community which is ever so busy covering its less than professional ass. You see getting it right would entail doing something to change the "back offices" - rooting and pillaging the gamblers who've benefitted and employing competant staff who are diligent.

I can assure you that ain't gonna happen.

Instead, what there will be is tons of coming litagation that will keep people tied up for years, all making money off that - "hedging" their own personal incomes through activities related to fighting being charged with crimes and lack of diligence. Trust me on this!

Expect lots of changes on the deck of the Titanic, as executives/greedsos suddenly move from one "hat" to another. But essentially, the same old dross will be firmly in control. So the "accountant" suddenly ends of being the Human Resources guy: the head of the trading wing suddenly becomes "Compliance Officer". It's easy peesy to rewrite job descriptions, I know. I've done it when European banks came swanning into the US following deregulation and have a very fine idea how all the rearrangements are actually done. If you think the regulators care, guess again. There are actually PR firms (called consultants) who specialized in this very activity and charge a nice little buck for their services.

If nothing changes, nothing changes

~Ernie Larson

Veeger

Citigroup offloads assets from SIVs

By Paul J Davies in London, David Wighton in New York and Adam Jones in Paris

Published: December 10 2007 22:04 | Last updated: December 10 2007 22:04

Citigroup has slashed the size of its struggling off-balance-sheet investment funds by more than $15bn in two months through quiet side deals with some junior investors, according to people familiar with the business.

The news that the troubled US bank has been finding ways to offload assets from its structured investment vehicles (SIVs) without resorting to fire sales comes as Société Générale on Monday became the latest bank to announce a bail-out for its own $4.3bn vehicle. SocGen’s decision follows similar moves by HSBC, Standard Chartered and Rabobank in the past fortnight.

Previous article!!

Citigroup offloads assets from SIVs

By Paul J Davies in London, David Wighton in New York and,Adam Jones in Paris

Published: December 11 2007 02:00 | Last updated: December 11 2007 02:00

Citigroup has slashed the size of its struggling offbalance-sheet investment funds by more than $15bn in two months through quiet side deals with some junior investors, according to people familiar with the business.

The news that the troubled US bank has been finding ways to offload assets from its structured investment vehicles (SIVs) without resorting to fire sales comes as Société Générale yesterday became the latest in a string of banks to announce a bail-out for its own $4.3bn vehicle. Both moves appear likely to reduce the impetus behind plans for the so-called "super-SIV", conceived by Citigroup, Bank of America and JPMorgan with the backing of the US Treasury as a buyer of last resort for the industry that would prevent fire sales.

SIVs, which sell cheap, short-term debt to invest in higher-yielding, longer term assets, have been at the centre of the credit squeeze of recent months as all kinds of investors have ditched exposure to anything that could be tainted by exposure to US subprime mortgages.

Citi yesterday refused to comment on asset sales by its seven SIVs - all of which have been put on watch for downgrades by the rating agencies - but people familiar with the vehicles said their size had been cut from more than $80bn at the end of September to about $66bn.

Most of the cuts have come from selling portions of a SIV's portfolio of assets to investors in the most junior notes at market values.

In return for taking the loss in the value of their notes in such sales, which will be about 40 per cent in many of Citi's SIVs and putting in more money, the investors could reap greater profits later from any recovery in their value.

Meanwhile, SocGen's decision to absorb its sole SIV - which had been dubbed Pace, for 'Premier Asset Collateralised Entity' - follows similar moves by HSBC, Standard Chartered and Rabobank in the past fortnight.

The SIV industry's problems are causing headaches for US money market funds, which are big investors in their debt.

Money market fund managers have been supporting funds to ensure that their asset values do not fall below par - or "break the buck".

Bank of America yesterday said that it was winding down its $12bn Columbia Strategic Cash Portfolio, after losses on holdings of paper sold by SIVs.

The fund is an "enhanced cash" fund, a riskier form of money market fund sold only to institutions and high-net worth individuals.

The net assets of the fund have fallen to 99.4 cents on the dollar.

Citigroup SIVs Draw $7.6 Billion of Emergency Funds (Update2)

By Neil Unmack and Jody Shenn

Nov. 6 (Bloomberg) -- Citigroup Inc., the largest U.S. bank by assets, provided $7.6 billion of emergency financing to the seven structured investment vehicles it runs after they were unable to repay maturing debt.

The SIVs drew on the $10 billion of so-called committed liquidity provided by Citigroup, according to a Securities and Exchange Commission filing yesterday. Shares fell to the lowest since 2003.

Citigroup's disclosure came a day after it announced as much as $11 billion of debt writedowns linked to U.S. subprime mortgages, and the resignation of Chief Executive Officer Charles O. ``Chuck'' Prince III. The New York-based bank also said in the SEC filing that the amount of securities it owns that are considered hardest to value, known as Level 3 assets, rose 42 percent in the third quarter to $135 billion.

``This company, if it were any other company, would probably be considered to be operating in an unsafe and unsound condition,'' said Josh Rosner, managing director at New York- based investment research firm Graham Fisher & Co.

SIVs sell commercial paper to buy longer term assets such as mortgage or bank bonds. Citigroup SIVs have no direct investments in subprime assets and $70 million of ``indirect exposure'' through collateralized debt obligations, or bonds that package debt, according to the filing, based on figures as of Oct. 31.

Avoiding Fire Sale

Citigroup purchased the commercial paper from the SIVs it advises ``on arms' length commercial terms'' as part of its existing commercial paper programs, Jon Diat, a Citigroup spokesman in New York, said in an e-mailed statement today.

The bank won't consolidate the assets of the SIVs on its balance sheet, according to the filing.

Citigroup created the first SIV in 1988 and is the largest manager of the companies. The bank, along with JPMorgan Chase & Co. and Bank of America Corp., agreed last month to start an $80 billion fund to help SIVs avoid dumping their $320 billion of holdings at fire sale prices and further roiling credit markets.

Citigroup fell $1.16, or 3.23 percent, to $34.74 at 12:30 p.m. in New York Stock Exchange composite trading, after declining 4.9 percent yesterday. The stock had dropped more than 35 percent this year before today. Only National City Corp. and Washington Mutual Inc. had posted bigger losses of the 24 companies in the KBW Banks Index.

LTCM Experience

Credit-default swaps tied to Citigroup bonds traded at the highest level in at least five years yesterday, suggesting investor confidence is eroding. The contracts, used to speculate on a borrower's ability to repay debt, rise as the perception of credit quality deteriorates. The contracts fell 2 basis points to 70 basis points today, according to Phoenix Partners Group in New York.

Citigroup named Richard Stuckey, 51, to manage most of its $43 billion of subprime mortgage assets, the same executive who helped unwind hedge fund Long-Term Capital Management LP's bad bets nine years ago.

Investors are refusing to buy commercial paper, loans due in 270 days or less, from some SIVs because they are concerned about the value of the mortgage securities, asset-backed debt and finance company bonds they own.

U.S. asset-backed commercial paper shrank for 12 straight weeks to a seasonally adjusted $874.7 billion last week, the lowest since April 2006, according to the Federal Reserve in Washington.

`Backing Away'

``Citigroup has one of the more established bank-sponsored SIVs in the sector,'' said Priya Shah, a structured credit analyst at Dresdner Kleinwort in London. ``If they are drawing on their liquidity it shows that investors are backing away from the sector as a whole and they are not really differentiating.''

The largest of Citigroup's SIVs is Centauri Corp., with $20 billion of assets, according to the filing. The six other companies are Beta Finance Corp., Dorada Corp., Five Finance Corp., Sedna Finance Corp., Vetra Finance Corp. and Zela Finance Corp. All are based in the Cayman Islands.

Citigroup's SIVs sold $19 billion of assets between July and the end of September, reducing their assets to $83 billion from just over $100 billion, according to the filing. About 98 percent of the companies' assets are fully funded through the end of 2007, the filing said.

Citigroup said it doesn't own any of the SIVs' capital notes, which rank below the senior commercial paper and first in line for losses.

-- With reporting by Shannon D. Harrington. Editor: Reierson (grs/ajr)

See also: http://www.iht.com/articles/2007/12/10/business/siv.php

Why Citi May Need a Merger
BusinessWeek - 1 hour ago
One of the key problems a new Citi CEO will face is its exposure to sivs (structured investment vehicles), off-balance sheet investment funds that borrow in ...
Takeover or breakup for Citi FT Alphaville
In the Lead Barron's
New Citi leader will inherit sprawling mess Guardian Unlimited
all 20 news articles »

Citigroup's Mills says bank's reputation at risk on SIVs
MarketWatch - 4 Dec 2007
This protects the SIVs from being forced to sell assets at a loss to meet debt repayments. Meanwhile, the Citigroup SIVs could become even more reliant on ...

The economic crisis closely examined, even tho the White House and CONgress loaf.

Crony-Capitalists Fiddle While Main Street Burns

Crashing Citigroup

By PAM MARTENS

The saga of how the top minds in Washington and on Wall Street have dealt with the deepening financial crisis in the U.S. would make a great Hollywood screenplay, except for this: it's absurdly unbelievable.

Storyline: The largest bank in the United States (by assets), Citigroup, is discovered to have stashed away over $80 Billion of Byzantine securities off its balance sheet in secretive Cayman Islands vehicles with an impenetrable curtain around them. Citigroup calls this black hole a Structured Investment Vehicle or SIV. Wall Street insiders call it a "sieve" that is linked to the breakdown in trading of debt instruments around the globe and the erosion of wealth in assets as diverse as stock prices to home values. Additionally, tens of billions of dollars in short term commercial paper backed by these and similar Alice in Wonderland assets are sitting in Mom and Pop money market funds at the largest financial institutions in America, with a AAA rating from our renown credit rating agencies.

Setting: Picture the Titanic shortly after it crashed into the iceberg. Imagine that its officers want to pretend to all its passengers and crew and investors that there is no serious damage because the giant floating Citi did not really hit an iceberg; it just hit a wall of worry. It will be able to right itself in no time at all as long as everyone remains calm. Even though the lavishly appointed ship is dangerously listing (stock price fading daily) it says it can stay afloat by an ingenious bailout plan. Everyone just needs to walk calmly to the dining room, collect a tea cup, and pitch in with the bailout.

This is effectively what the U.S. Treasury has anointed as a game plan: Citigroup, the gargantuan and troubled bank, will be bailed out by virtue of all of its smaller competitors chipping in some money to a SuperSIV, a kind of Big Daddy Black Hole whose details are apparently too scary to release to the public. These are the very same competitors who lost market share to Citigroup because Federal regulators allowed it to grow fat and sassy by playing dirty, including collecting massive fees for hiding debt for bankrupt Enron, WorldCom and Italian dairy giant, Parmalat.

Flash Forward: The Federal regulators are busy attempting to restore confidence on the slippery deck of the listing craft. The U.S. Mint has just released a bronze coin celebrating the newly elected (albeit reluctant) Chairman of Citigroup, Robert Rubin, for his days as U.S. Treasury Secretary. [2] No mention on the flip side of the coin that Rubin was one of the cheerleaders who helped win the repeal of the depression era, investor protection legislation called the Glass-Steagall Act. Without that repeal, Citigroup would not exist; nor would its current threat to the financial infrastructure of our country. No mention, either, that Rubin went from government service to Citigroup's board and has collected tens of millions in compensation for a job that did not involve a lot of sweat.

The small brass band on the deck of Citigroup has just been revved up to a big orchestra with Federal Reserve Board Chairman, Ben Bernanke, as Maestro. According to Bloomberg News, invitations have gone out to 16 financial institutions offering a personal, one-hour audience with Chairman Bernanke, ostensibly as the grand prize for chipping in to the SuperSIV bailout fund. (I'm visualizing a new commemorative bronze coin from the U.S. Mint that we can pass down to our children in lieu of a real currency with value. It would be inscribed: "The Shock and Awe of Crony-Capitalists: While We Were Looking for Foreign Threats in Mountainous Caves, Our Own Crony-Capitalists, In Broad Daylight and In Full View of Congress, Flew Our Largest Bank Into the World's Largest Economy and Crashed Both to Smithereens." )

Fade to Citigroup Set: Inside Citigroup, it's business as usual. The ousted CEO, Chuck Prince, who had to own up to approximately $17 billion in write downs and Cayman Islands' black holes, is receiving a bon voyage package that includes a performance bonus of $12.5 million, salary and stock holdings of $68 million, a $1.7 million pension, an office, car and driver for up to five years. And Citigroup, clueless as to what its own assets are really worth, is putting out research recommendations daily to investors, advising them what other companies are worth. On November 16, it said it particularly likes bank stocks (those entities with billions of dollars of Citigroup toxic waste in their money market funds).

Back to the Scene on the Titanic. We have thousands of opulently clad people pouring tea cups of opaque, muddy water from the giant craft when someone wants to know why the Captain isn't there helping out. (The original captain, Sandy Weill, left early in the voyage via a lifeboat loaded with lots of provisions, a rolodex of criminal defense lawyers, and approximately a billion dollars.) It turns out that the new bronze coin captain, Robert Rubin, is not on deck bailing water because he has better things to oversee. He's watching his dangerously listing ship load aboard a bunch of hapless, new passengers from a small ship that came alongside. That's right. Citigroup, barely able to keep its own head above water, pay its dividend, shore up its capital, and regain the confidence of shareholders, has joined with other investors to spend $6.3 Billion on a British water company, Kelda Group Plc. [3]

And while underwater Citigroup buys water, what, you might ask, is Congress doing about the millions of struggling homeowners across America who were tricked into land-mind mortgages by predatory lenders like Citigroup's CitiFinancial and are facing imminent foreclosures on their homes. [4] [5] Congress is also fiddling rather than bringing strong legislative action against its biggest campaign contributors.

Like I said, it's just too preposterous for a movie; but it's the tragic new reality of Crony-Capitalist-Owned America.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire.

[1] More on Citigroup and troubled money market funds from CounterPunch.

[2] Bronze coin from U.S. Mint in honor of Robert Rubin.

[3] Citigroup, underwater, buys water.

[4] Congressional testimony on how CitiFinancial skewered the American dream of home ownership.

[5] Read an affidavit filed with the Federal Trade Commission by a former Assistant Manager of CitiFinancial on how she and colleagues targeted the uneducated, inarticulate, minority, very old, very young or very gullible.

This week's opening stock market analysis (last one?)

I don't intend to publish many more weekly market updates. We all know how to spell FEAR. we can take a pretty big stab at the word "liquidity", too. But how many call spell the word

C R A S H

Why? What's the point? The mainstream media is going to continue to downplay just HOW BAD IT IS and distract people from major points to consider. It's not all about some "housing bubble" gone wrong, it's not even that PLUS the currency crisis, and it's not about Structured Investment Vehicles the latest! greatest! new bailout invented (and signed in 2005 as I have previously shown, thanks to a "tip")

P A N I C A T T A C K

It's about how do we ensure we get adequate FACTS when all the books and figures are COOKED. How do we keep our eyes peeled for the effects upon nations, and people and away from looking at what the gamblers, crooks and crazeeeeeeeees take as truth?

but since this week could bode well for "good" or for "evil", I'm using here the LA Times writeup to show what yesterday's (Monday's) market looked like to the AMERICOCENTRIC. It looks quite different to a Russian Finance Minister, a German householder, a Chinese pensioner, that is for sure.

F I G H T O R F L I G H T

But you gentle reader, can read the below as sign of things to come .. just a notation of the FEAR and PANIC going on. I have added a fresh link - FIRE SALES, if you look. And why would ANYONE with any sanity rush to T-Bills? Quality? Give me a BREAK.

People wonder why BIG PHARMA cooked up VALIUM and CLONAZEPAM (Xanax to YOU): I don't.

Virginia

MARKETS

Stocks plunge on financial system fears

The Dow tumbles 237 points, while the S & P 500 is down 10% from its recent high.

By Tom Petruno, Los Angeles Times Staff Writer
November 27, 2007

Stocks plunged anew Monday on worsening fears about the financial system, driving the Dow index down 237 points and leaving the Standard & Poor's 500 index off more than 10% from its recent record high -- the sharpest pullback in more than four years.

Markets may be reaching a pivotal moment in the turmoil rooted in the housing sector's troubles, some analysts say.

With the latest steep sell-off in stocks, blue-chip indexes fell into "correction" territory -- meaning a decline of at least 10% from their peaks.

What's more, some investors continued to rush into Treasury bonds as a haven, driving yields on the securities to new multiyear lows.

The gloom has become so thick that some analysts say markets are overdue for a respite. "Sentiment is so bearish you have to wonder who's left to sell," said Sam Stovall, investment strategist at Standard & Poor's in New York.

In a surprise announcement late Monday that could help Wall Street's mood, struggling banking giant Citigroup Inc. said it would receive a $7.5-billion capital infusion from the sovereign wealth fund of Abu Dhabi. That helped trigger a rebound in Asian stock markets early today.

The danger is that if the market atmosphere doesn't lighten soon, it could get far worse as more investors move to protect their portfolios, Stovall and others acknowledge.

Fresh worries about the health of the banking system sent the Dow Jones industrial average down 237.44 points, or 1.8%, to 12,743.44, leaving it down slightly more than 10% from its all-time closing high Oct. 9.

The S&P 500 slid 33.48 points, or 2.3%, to 1,407.22. It's off 10.1% from its record high of 1,565.15 also set Oct. 9.

That means the latest decline now has exceeded the 9.4% drop in the S&P 500 from mid-July to mid-August, amid the first throes of the global credit crunch.

It's also the biggest pullback since the index fell nearly 15% from late 2002 to March 2003, just before the Iraq war began.

Once a decline in the indexes exceeds 20% it's generally considered a full-on bear market.

As usual in recent months, financial stocks led the day's sell-off, after HSBC Holdings, Europe's biggest bank, said it would shift $45 billion of assets now in two struggling specialized investment funds to its own balance sheet to avoid a fire sale of the debt securities.

The move raised concerns that other big banks would have to make similar moves, taking substantial losses in the process -- atop the tens of billions of dollars in write-offs tied to mortgage defaults already recorded.

As the banks reel from loan losses, investors have grown fearful that the stress on the financial system could become severe, with potentially dire consequences for markets and the economy, said Lou Crandall, economist at Wrightson ICAP in New York.

"I think there are a lot of investors who recognize that the risk of an accident is far greater than it has been in a long time,"

he said.

That is driving big investors into Treasury bonds as a haven, analysts say. On Monday, heavy buying of government securities pushed the yield on the 10-year T-note to 3.84%, down from 4% on Friday and the lowest since spring 2004. Bond yields fall as the securities' prices rise.

"It's a total fear thing, top to bottom,"

Kevin Giddis, a bond trader at Morgan Keegan Inc. in Memphis, said about the rush into Treasuries.

Stock and bond markets failed to be soothed Monday by the Federal Reserve's statement that it would supply more money to the banking system between now and year's end in an attempt to forestall any cash shortages.

Yet some analysts said the latest sell-off in stocks may well have marked at least a short-term bottom for the market -- and for bond yields.

Crossing the 10% correction level, some said, should bring in bargain-hunters.

"I think we're closer to a bottom here than people think," said Larry Adam, investment strategist at brokerage Deutsche Bank Alex. Brown in Baltimore.

Like many optimists, he doesn't believe that the housing sector's woes will be enough to drag the economy into recession, and expects that investors soon will be attracted to lower stock prices on the assumption that the market will recover in 2008.

Tony Dwyer, equity market strategist at FTN Midwest Research Securities in New York, said the markets were in a

"pure fear-based flight to quality."

What investors have learned about other times like this, he said, is that "you almost always want to take advantage of it" by buying stocks for a rebound.

Today could be a key test for the market, Stovall said. If the S&P 500 can hold above its lowest close in August -- which was 1,406.70 on Aug. 15 -- it could encourage market bulls to jump in.

Still, Dwyer said it wasn't clear whether any near-term rebound would be sustainable. That will depend on whether the global economy can continue to expand -- which may, in turn, depend on whether the U.S. can avoid recession.

"The greatest risk to investors right now is that the global growth story doesn't work out the way they thought,"

he said.

Among Monday's market highlights:

* The drop in the S&P 500 index pushed it back into the red for the year to date, off 0.8%, not including dividends. The Dow still is up 2.2% for the year.

* Losers topped winners by about 3 to 1 on the New York Stock Exchange and on Nasdaq. The Nasdaq composite fell 55.61 points, or 2.1%, to 2,540.99.

The Russell 2,000 small-stock index tumbled 2.6%, and is down 14.1% from its peak July 13.

* In the financial sector, Freddie Mac fell $1.97 to $24.50 and Fannie Mae lost $3.28 to $28.92 after brokerage UBS cut its ratings on the mortgage giants to "neutral" from "buy," citing rising loan defaults.

Among other financial issues, Citigroup slid $1 to $30.70, Bank of America fell $1.27 to $41.88 and Merrill Lynch lost $2.31 to $51.23.

* Retail stocks fell despite what some analysts said was an encouraging start to the holiday shopping season. Kohl's fell $1.23 to $47.49; Target slid $1.95 to $55.22.

tom.petruno@latimes.com

Goldman on Citi - SELL before the next $15bn hits

Related
Goldman Sachs Behind Sky-High Oil Prices?
---
"With $84bn in SIVs and $73bn of ABCP facilities providing ample material for additional nasties to emerge, Goldman estimates that the bank could fall nearly $4bn short on its pledge to meet 7.5 per cent Tier-1 capital ratio by the end of the second quarter next year."
---
Goldman on Citi - SELL before the next $15bn hits

The golden child of the banking world has turned on the prodigal son. Goldman Sachs - which will not, repeat not, be making significant write-downs - has had it with the cult of the disappearing dollars elsewhere on Wall Street.

The bank’s analysts have slapped a sell order on Citigroup, downgraded their estimates, and lowered their target price to $33. US futures fell on the back of the note. Citi were down 2.6 per cent at $33.11 a share in premarket trading.

Citi’s down 40 per cent this year, and 28 per cent over the past three months, but the team at Goldman believe that the rudderless banking behemoth has further to fall.

We see four factors driving underperformance: (1) additional write-offs on its remaining $43 billion of CDO exposure, (2) pressure on the firm to shore up Tier-1 capital ratios which may need to come from an equity infusion, asset sales, or a reduction in the dividend, (3) deteriorating consumer credit trends and higher corresponding provisions and charge-offs, and (4) no clear leadership at the firm.
Citi has already said that it will face $8 to $11bn of write-offs on its CDO porfolio in the fourth quarter. Goldman think that will come it at the top end of the range, with a further $4bn to come in the first quarter of next year.

With $84bn in SIVs and $73bn of ABCP facilities providing ample material for additional nasties to emerge, Goldman estimates that the bank could fall nearly $4bn short on its pledge to meet 7.5 per cent Tier-1 capital ratio by the end of the second quarter next year. Citi has indicated that it will not take assets from the SIVs it manages onto its balance sheet, notes Goldman, but the bank has already provided $10bn in emergency funding to the vehicles.

A Tier-1 shortfall would leave Citi facing some rather unpalatable options to boost its ratio from their estimate of 7.2 per cent to the desired level, including cutting its dividend, issuing equity and asset sales. Which of those is preferred will very much depend on who ends up in Chuck Prince’s recently vacated hotseat.

The bad news for Citi isn’t contained to its CDO and SIV exposure, argues Goldman’s William Tanona. With the US consumer under pressure and housing metrics proving increasingly dire, the bank faces pressure across its businesses. And with an absence of leadership and the impetus on getting the firm’s risk management under control, Tanona adds that Citi may be unable to move on new opportunities and put its meaty balance sheet to good use as openings appear.

That, suggests Goldman, may prove debilitating into late 2008 or even 2009.

This entry was posted by Helen Thomas on Monday, November 19th, 2007

Posted by CRIMES AND CORRUPTION OF THE NEW WORLD ORDER NEWS mparent7777 Marc Parent CCNWON at 12:05 PM

Reason to get agitated or AFRAID No. 10 million: Hank's accounting "rules"
Gotta just "love" the rich, eh??

        October 19, 2007

Enron Accounting at Citigroup

by Mike Shedlock
          In the aftermath of the collapse at Enron, new rules were
put in place to prevent corporations from holding assets off the books.
However, anyone reading about massive SIV problem knows Citigroup and
other banks are Still Operating in the Shadows of Post-Enron Rules.
  Changes enacted after Enron Corp.'s collapse were supposed to
prevent companies from burying risks in off-balance-sheet vehicles. One
lesson of Enron was that the idea that companies could make profits without
taking any risk proved to be as ridiculous as it sounds.
Regulators made a great show of slamming closed that loophole. But as
the current situation makes clear, they not only didn't close it all
the way, but the new rules in some ways made it even harder for
investors to figure out what was going on.
My comment: Banks never want anyone to know what they are doing for
the simple reason no one would trust the system if they did. In addition
it allows them to operate in the shadows making huge profits when all
goes well, and requesting bailouts from the Fed when they do not.
  SIVs, along with vehicles called conduits, don't get recorded on
banks' books because regulators and accounting-rule makers gave banks a
pass when crafting post-Enron rule changes meant to curtail
off-balance-sheet activity.
No one is saying, of course, that the big banks are literally shams
like Enron.
My comment: Although the initial setup was greed and stupidity at
Citigroup vs. greed and fraud at Enron, the latest master liquidity
enhancement conduit (M-LEC) proposal is every bit the cover-up that was
happening in the latter stages at Enron. The worst aspect of this bailout is
that it is sponsored by the Treasury.
  A spokesman for the Financial Accounting Standards Board, which
drafted the current rules, declined to comment.
Citigroup, for example, has nearly $160 billion in SIVs and conduits,
but its shareholders wouldn't get a clear view of this from reading
the bank's balance sheet. Instead, footnotes only disclose that the bank
provides "liquidity facilities" to conduits that had, as of June 30,
$77 billion in assets and liabilities.
My comment: That's one problem right off the bat with this mess. No
one really knows how big the problem is. So far I have seen three
figures for Citigroup: $80 billion, $100 billion, and now $160 million. To be
fair the latter includes both SIVs and "conduits". However, I suspect
most thought that $80 billion figure was all inclusive. Now we see the
all inclusive number is twice that.
Are more disclosures coming? I think we can count on that. In
addition, many hedge funds have executed the same fatal strategies as
Citigroup (borrowing short and lending long) on mortgage related assets outside
of SIVs and banking relationships. For more on the follies of
borrowing short and lending long please see Duration Mismatch Causing Severe
Stress Everywhere
That lends the question: how many hedge funds have held off marking
these assets to market? Potentially massive future writeoffs are hidden
by both banks and hedge funds playing shell games, or Don't Ask - Don't
Sell strategies which are nothing more than fraudulent attempts at
concealment. Is the total amount of money bet on such strategies double,
triple, or quadruple what has been disclosed? No one knows. No one wants
us to know either.
  "Generally, the company has no ownership interest in the conduits,"
the bank's second-quarter filing, the latest available, states. The
Citigroup filing makes no mention of SIVs. In a letter to investors in
August, Citigroup disclosed that it had about $100 billion in SIV assets,
although that has since declined to about $80 billion.
My comment: Therein lies the problem. That problem is called
ownership. Apparently the post-Enron rule for banks was that if you did not own
it, you did not have to put it on the balance sheet. So sham
corporations were created, banks lent money at short-term rates to those
corporations at a markup. Those corporations in turn invested in long term
securities like mortgages.
With "borrow short lend long" strategies everything is fine as long
as asset prices rise. However, all hell breaks loose when the value of
those long term assets sinks.
In adverse conditions, banks are no longer willing to provide short
term financing, and instead want their money back. Unfortunately there
is no money to give back because the borrowers bet it all on mortgages
or other asset backed securities that are now dropping like a rock.
Such strategies caused the complete destruction of two hedge funds at
Bear Stearns. See The Redemption Trap & Merrill Lynch Cover-Up for
more on Bear Stearns.
  Banks typically agree to acquire the assets of their affiliated
conduits if they can't roll over their IOUs. But they only backstop a
portion of SIV assets. That might make it seem like the banks have some
liability, and indeed some have had to step in. But backstops aren't a
sign of ownership under accounting rules, though. In fact, most
off-balance-sheet vehicles, conduits and SIVs included, don't have "owners" in
the traditional sense. Rather they are like corporate zombies and are
typically set up in offshore tax havens.
My comment: This is indeed how banks ducked the ownership rule. And
now that Citigroup has bent every rule under the sun to avoid Post-Enron
Rules, it now is seeking a bailout that will allow it to do exactly
what Enron was doing: hide a horrendous balance sheet and in effect keep
two sets of books. Paulson calls this a "market based solution". It is
anything but a market based solution. The true definition would be
called Enron Accounting at Citigroup Sponsored by the Treasury.
How Big is the Problem at Citigroup?
With a hat tip to Polecolaw for the idea, let's compare net tangible
assets at Citigroup to the amount at risk at SIVs and conduits. Let's
use $160 billion figure for the combined SIV and conduit numbers and see
what comparisons we can find.
Citigroup Net tangible assets as of June 30 2007 are $65.5 billion.
That's kind of interesting isn't it? Citigroup has $65.5 billion in net
tangible assets but $160 billion invested in off balance sheet SIVs and
conduits.
If a fire sale of those SIVs and conduits resulted in a 25% loss,
Citigroup would have net tangible assets of $25.5 billion. If a fire sale
of SIVs and conduits resulted in a 41% loss in those SIVs and conduits,
Citigroup would have zero net tangible assets.
Does Paulson, the Fed, or Citigroup want to find out what those
assets are worth? Of course not. That is the reason for a Don't Ask - Don't
Sell policy and approval of Enron Style Accounting by Paulson.