The Citi Tsunami
Citigroup’s frighteningly large new losses were triggered by two events: a further downturn in the US housing market this autumn; and downgrades of sub-prime US mortgage-related assets by rating agencies.
Here’s the worrying thing about Citi’s overnight statement. Much of the losses related to $43bn in “ABS CDO super senior exposure” backed mainly by “sub-prime RMBS collateral”.
I’ll translate that for you. It means Citi is suffering humungous losses on the reprocessed and repackaged bits of sub-prime – or exposure to US homebuyers with a poor credit history – that were supposed to be top quality, not far off the quality of top corporate bonds or government debt.
Citi has given the lie to the idea that was so prevalent in markets over the past few years that financial engineering – through the medium of collateralised debt obligations and structured credit – could turn ordure into gold.
So let’s hope that the painful experience of Citi and other institutions leads bankers to once again show due respect for one of the golden rules of banking: you may be able to make money from merde, but don’t pretend you’re selling anything but merde.
Citi estimates that since September 30 (the end of its previous accounting quarter) the decline in the value of its sub-prime exposure will reduce reported revenues by between $8bn and $11bn.
That would be enough to bankrupt many a good size bank. But then many a good size bank isn’t big enough to accumulate exposure to sub-prime on the scale of what Citi did, or some $55bn as of September 30.
And don’t forget that these losses relate to just one portion of Citi’s business. This is a bank which grew its assets – primarily its lending – by an astonishing $769bn or 48 per cent over the past 21 months.
Such asset growth is astonishingly and disturbingly fast at a time when there were bubble conditions in many markets. Not all of that new lending will have been top quality.
Anyway, it’s funny what people end up doing. I’ve known Win Bischoff since the 1980s, when he was just a youngish man on his way up as head of the small London merchant bank, Schroders. Now he’s a grand old man of world banking, and is stepping into the breach at Citi, the world’s biggest bank as chief executive – albeit on a temporary basis, until a permanent replacement can be found for Chuck Prince.
The other interesting board change is that the former US Treasury Secretary and one-time Goldman head honcho Robert Rubin is to become chairman – apparently on a permanent basis.
The previous incumbent of those two posts, Prince, says he is doing the honourable thing by going, though honour may have been prompted by hard economic reality. Still, his exit will cause a frisson among senior bankers all over the world, because few of their organisations will escape unscathed from the problems in credit markets.
That said, Citi’s hit from sub-prime is spectacular. And it will cause widespread concern that other banks will be forced to disclose increased losses from their respective holdings of sub-prime, CDOs and the rest of the gilded rubbish, probably exacerbating a downturn in bank shares that acquired momentum last week.