Saturday, July 19, 2008

Citigroup's Losses....

JPMorgan, Merrill Lynch, and now, of course, Citigroup. Sure, it's no "surprise." Nevertheless, these numbers are shocking.

The only reason you may be shrugging this off is because you can't conceive of how much $$$ this is--and because this news has become "commonplace."

The NYTimes reports,

Citigroup said Friday morning that it lost $2.5 billion, or 54 cents a share, in the second quarter.

The loss was largely caused by $7.2 billion of write-downs of Citigroup’s investments in mortgages and other loans and by a weakness in the consumer market, which cost Citigroup $4.4 billion in credit losses and $2.5 billion to increase reserves.

But the chief executive, Vikram Pandit, positioned the $2.5 billion loss as progress. Last quarter, the financial conglomerate lost $5.1 billion.

Read the complete NYTimes story.

Floyd Norris, the chief financial correspondent for the NYTimes, today is concentrating on what the Fed can do to fix itself--er, us. As in U.S.

He says,

"What we have here is a downward spiral, in which every institution wants more liquidity and less leverage. So banks sell assets and demand higher margins from those they have lent to."

Then he quotes
Markus K. Brunnermeier, a Princeton economist, whose paper, “Deciphering the 2007-08 Liquidity and Credit Crunch,” provides what Norris believes may be the best analysis yet of the origins of the crisis.

Mr. Brunnermeier concludes that this is a classic liquidity crisis, worsened by the extent of securitization, which made it difficult to determine underlying values and difficult even to figure out which institutions are at risk.

Norris writes:

Many of the securitization strategies used by banks and brokers were aimed at reducing the amount of capital they had to maintain while at the same time allowing them to take on more risks. Regulators knew that, but they had no idea of how severe a problem was being created. It is clear to everyone that, as Mr. Brunnermeier wrote, “we need to rethink our current regulatory framework to reflect recent financial innovation.”

But the regulators are in no mood to blame themselves. Instead, the S.E.C. is trying to make it harder to sell short shares in Fannie, Freddie and major banks. Starting Monday, you will have to borrow the shares before making the short sale, rather than simply determine that you can borrow them. The S.E.C. vows to watch carefully to make sure the rule is followed. That will probably raise the cost of borrowing such shares, and it could provide a temporary boost to the share prices.

But such moves do nothing to either strengthen the underlying balance sheets of the firms involved, or to make them more willing to lend to each other.
We know that mortgages were not the only loans made with reckless abandon of credit standards. But we have yet to see how much damage will be caused in such areas as commercial real estate, corporate loans and consumer credit cards if the economy continues to weaken. [Real C'ville's bolding, as usual]

So we have Jamie Dimon at JPMorgan telling us how terrible Prime is. We have leading economists preparing us for problems in commercial RE, corp loans, and consumer credit cards. What else is there to look forward to?

The American credit crisis has gotten so bad that the conspiracy theorists among us are predicting "terrorism" or a "natural" pandemic--just to deflect attention from the fact that the U.S. is spiraling downward from the status of Emperor and Empire. Think we're kidding? Google it.

But before you go, here's the logical outcome of last weekend's bailout: Freddie Mac Takes Steps Towards Selling BILLIONS of Dollars in Stock.

No comments: