Archive for 2008

  • Citigroup, Feds Reach Deal
    , November 24th, 2008 at 1:08 am

    Well, the deal is done. Citigroup reached a deal with the Feds whereby the government will backstop $306 billion of its crappy assets. Note that the assets are not being taken off the balance sheet (TARP is dead). In exchange, the government will get 8% preferred shares (i.e., our crappy assets). The government will also kick in another $20 billion of TARP money (Update: TARP lives!)
    For its troubles, Citi will now have to comply with the exec comp restrictions plus it has to go along with the FDIC’s mortgage modification program.
    There’s a lot going on here so let’s look at the objectives. For one, the government is aware that other troubled banks are watching this deal. Even if other banks never get it, a bar has been set that will influence future behavior.
    There’s also the question of preferred shares versus warrants. That could go either way. If it works and the price is good, the warrants could be a very good deal for taxpayers. Actually, it could be an insanely good deal. That’s a risk, however, I’m not inclined to take. For one, what price? Citi’s dropped something like 60% in the past few days. The warrants in this deal have a price of $10.61 which is the 20-day trailing price. Friday’s close was $3.77. You do the math. I don’t get why the preferreds pay 8% instead of the previous 5%. For taxpayers, I don’t see why we can’t get the same 10% that Buffett got from Goldman.

    The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.
    As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
    In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.
    With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
    We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
    * We will work to support a healthy resumption of credit flows to households and businesses.
    * We will exercise prudent stewardship of taxpayer resources.
    * We will carefully circumscribe the involvement of government in the financial sector.
    * We will bolster the efforts of financial institutions to attract private capital.

    Here’s the Summary of Terms.

  • Somali Pirates in Discussions to Acquire Citigroup
    , November 22nd, 2008 at 12:04 pm

    It had to happen sometime:

    November 20 (Bloomberg) — The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.
    The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said.
    “You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything,” said Ali.
    The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS’s are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody’s and S&P have already issued their top investment grade ratings for the PRBS’s.
    Head pirate, Ubu Kalid Shandu, said: “We need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster.”
    Shandu added, “We don’t call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better.”
    *CITI IN TALKS WITH SOMALI PIRATES FOR POSSIBLE CAPITAL INFUSION
    *WILL REQUIRE ALL CITI EMPLOYEES TO WEAR PATCH OVER ONE EYE
    *SOMALIAN PIRATES APPLY TO BECOME BANK TO ACCESS TARP
    *PAULSON: TARP PIRATE EQUITY IS AN `INVESTMENT,’ WILL PAY OFF
    *KASHKARI SAYS `SOMALI PIRATES ARE ‘FUNDAMENTALLY SOUND’ ‘
    *Moody’s upgrade Somali Pirates to AAA
    *HUD SAYS SOMALI DHOW FORECLOSURE PROGRAM HAD `VERY LOW’ PARTICPATION
    *SOMALI PIRATES IN DISCUSSION TO ACQUIRE CITIBANK
    *FED OFFICIALS: AGGRESSIVE EASING WOULD CUT SOMALI PIRATE RISK
    * FED AGREED OCT. 29 TO TAKE `WHATEVER STEPS’ NEEDED FOR SOMALI PIRATES

  • That’s Like Rearranging the SIVs off the Balance Sheet
    , November 21st, 2008 at 11:10 am

    The New York Times on Citigroup:

    Within the bank’s Manhattan offices, television screens have stopped displaying the company’s stock price. Traders have begun making jokes comparing Citigroup to the Titanic.

    Also, remember that Goldman Sachs IPO from nine years ago?

    Shares of The Goldman Sachs Group Inc. closed below their initial offering price of $53 on Thursday, a first since the company went public in May 1999.
    The stock dipped as low as $49 in intraday trading, closing at $52.36.
    The New York-based company’s shares reached a high of $247.97 on Oct. 31, 2007, creating a market value of $105 billion.

  • It Happened
    , November 21st, 2008 at 10:10 am

    Yesterday’s close:
    Dow = 7,552.29
    S&P 500 = 752.44
    Ratio = 10.037

  • Fun with Numbers
    , November 20th, 2008 at 12:23 pm

    The S&P 500 hit an intra-day low this morning of 776.76. That’s the exact same level as the closing low from October 9, 2002, the previous bear market low. Incidentally, the closing Dow low of August 12, 1982 was 776.92.
    The Dow is inches away from reaching 10 times the S&P 500 for the first time in 42 years.
    image742.png

  • Buffett’s Stock Slump
    , November 20th, 2008 at 12:10 am

    The Drudge headline says “Now Buffett in stock slump!” Berkshire was down 12% on Wednesday. Now let’s take a look at BRKA divided by the S&P 500.
    image741.png
    Not a bad slump.

  • TIPs Yields
    , November 19th, 2008 at 9:56 pm

    Here’s a look at the current TIPs yields-to-maturity listed by maturity date.
    image740.png

  • A 40-Year Look
    , November 19th, 2008 at 4:09 pm

    The S&P 500 closed at a 68-month low today. Given that the CPI report came out today, here’s an interesting stat. Adjusted for inflation, the S&P 500 has advanced just 23.9% in 40 years. Annualized, that’s 0.54%.
    This means that almost the entire gain came from dividends. I should add that this is a bit of playing with numbers since 40 years ago was a cyclical high, and I hope we’re near a cyclical low.
    Inflation over the last 40 years has increased by 513.5%. The S&P 500 closed today at 806.58. On November 19, 1968, the S&P 500 closed at 106.14. So the index has grown by 660%.

  • Heading Towards Deflations
    , November 19th, 2008 at 2:38 pm

    The TIPs say deflation is coming and may stay around for a bit:

    Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2 per cent fall in prices in 2009, a 2.5 per cent decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.
    As a practical matter, long before we had significant “negative prints” of consumer prices, the Federal Reserve would just flat out buy Treasury bonds and monetise away with “quantitative easing”. Gold dealers would replace hedge fund managers at the art auctions, model agency parties and Congressional hearings.

    But there’s more to the story. John Dizard says that the market is simply becoming less efficient:

    What’s really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can’t afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.

    Here’s another look at yield you can get for the TIP maturing in two months.
    research.stlouisfed.org1119.png
    It’s currently yielding 13.73%.

  • Inflation and Stocks
    , November 19th, 2008 at 1:48 pm

    With today’s report showing how steeply prices fell last month, I wanted to revisit the issue of inflation’s impact on stock prices. Let me add the important caveat that correlation doesn’t necessarily mean causation. The short answer is that inflation is bad for stocks. In fact, the only thing worse is deflation. What the market likes is inflation that’s nice, steady, predictable and low.
    Going back to 1926, there have been 72 months of deflation coming in below -5%. The inflation-adjusted total return for that period is an annualized loss of -9.6%.
    Here’s how it breaks out.
    Inflation Rate…………Real Stock Returns (annualized)
    Below -5%…………………………-9.6%
    Between 0% and -5%………….20.9%
    No Inflation………………………..17.1%
    Between 0% and 2%…………..10.0%
    Between 2% and 5%…………..14.1%
    Between 5% and 7.5%………..-0.2%
    Between 7.5% and 10%………-2.8%
    Over 10%………………………….-11.1
    Basically, when inflation is over 5% or under -5%, the market averages a real 5.5% loss. When inflation is between -5% and 5%, it average a 15% gain.