Thursday, December 13, 2007


It’s the end of the semester and I am buried in grading, exams, etc. A lot has been happening over the past week, so I decided to write a quick update on a few topics and provide a few links. I’ll get back to articles when the smoke clears. Thanks for checking in.

Citi finally stepped up to the plate and announced it would consolidate the SIV assets on its books (my guess is this means no M-LEC). There are net assets of approximately $49 billion. The really important thing to me, however, is that there are finally details! Hooray Citigroup! You can find the announcement by Citigroup here, and the details regarding the SIV assets here. I note the absence of subprime mortgage exposure and that takes the wind out of my Subprime Conspiracy Theory (at least with respect to the SIVs).

According to this Reuters article Moody’s has already downgraded Citigroup senior unsecured debt to its fourth highest rating of Aa3, and

Moody's also lowered Citibank N.A.'s bank financial strength rating to B from A- and Citibank's long-term deposit and senior debt rating to "Aa1" from "Aaa."

It will be interesting to see if any of this impacts the ratings on other off-balance sheet conduits for which Citi provides credit enhancement.

The Credit Crises:
I highly recommend this related article in today’s WSJ Online Edition that provides a well written perspective on the de-leveraging we may be witnessing. If the author of this piece is correct, we could be in for some very bad economic times ahead as we unwind all of the leverage created by securitizations that investors don't want to purchase anymore.

There is a battle going on in Congress over the AMT fix and how to pay for it (although some argue that it need not be paid for as it was never supposed to be collected in the first place). The House Democrats want to increase taxes to pay for the loss of AMT revenue by taking the carried interest sham away from hedge fund managers. I like that idea, but I don’t think they have the votes to get it through the Senate and an almost certain veto by Bush, so righting that wrong will likely take a back seat for now. That’s too bad. You can get my opinion on that tax po$%#@icy here if you like.

With today’s headline year-over-year PPI inflation number of 7.2% (the highest since 1973) and continued concern over economic growth stagflation risk appears to be gaining some momentum, although retail sales came in stronger than expected. I note, however, that if we are about to witness massive de-leveraging (see the Credit Crises above), inflation is not likely to be a problem.

Back to grading.

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Anonymous said...

The Nightly Business Report featured Richard Bove, Banking Analyst with Punk Ziegel & guest on December 13. He made some interesting comments about Citigroup and other banks. You can find the transcript of his comments here:

His assessment is: there will be bank mergers and aquisitions ahead in the next business cycle

Palermo's Blog said...

Thanks for the link. I wonder if any of those mergers will be at the behest of the FDIC:-)