Citi of over-leveraging "Sharing" Citigroup's losses above $29bn, as agreed in the US bailout plan for the group finalised Sunday night, doesn't sound too promising for US taxpayers. What's worse is that the amount may not be enough. For a start, the $27bn being injected in the form of preferred shares will do little to stem further losses, which come out of common equity (discussed at length, here and here). To send further chills down taxpayers' spines, see this calculation from Rolfe Winkler at Option ARMageddon: [table] That's frightening for a couple of reasons. Firstly, as Winkler notes, it means the bank has $56 of assets for every $1 of common equity. -- or a leverage ratio (assets/equity) of 56. With leverage of 56, if the value of those assets were to fall 2 per cent (not so unlikely in the current writedown-prone environment), then common stockholders are wiped out. This tallies roughly with FBR's argument last week for the need of $1,000bn in tangible common equity to absorb losses stemming from what is essentially an over-leveraged financial system. Secondly, the calculation doesn't include Citi's off-balance sheet assets -- which amount to something like a whopping $385bn according to FBR.
"Sharing" Citigroup's losses above $29bn, as agreed in the US bailout plan for the group finalised Sunday night, doesn't sound too promising for US taxpayers.
What's worse is that the amount may not be enough. For a start, the $27bn being injected in the form of preferred shares will do little to stem further losses, which come out of common equity (discussed at length, here and here). To send further chills down taxpayers' spines, see this calculation from Rolfe Winkler at Option ARMageddon:
[table]
That's frightening for a couple of reasons. Firstly, as Winkler notes, it means the bank has $56 of assets for every $1 of common equity. -- or a leverage ratio (assets/equity) of 56. With leverage of 56, if the value of those assets were to fall 2 per cent (not so unlikely in the current writedown-prone environment), then common stockholders are wiped out. This tallies roughly with FBR's argument last week for the need of $1,000bn in tangible common equity to absorb losses stemming from what is essentially an over-leveraged financial system.
Secondly, the calculation doesn't include Citi's off-balance sheet assets -- which amount to something like a whopping $385bn according to FBR.
A leverage of 56 means that it takes only a 2% drop in the average value of your assets to have the equity wiped out. In the long run, we're all dead. John Maynard Keynes
the first one, the banks swallowed, last year. The second brought them to their knees and this is the hole being plugged not by governments around the world; the third is coming now as the economy stops and will be deadly. In the long run, we're all dead. John Maynard Keynes
London Banker's question comes back to mind.
What happens to the global markets when the deleveraging stops? What happens when there are no more global margin calls on the surviving hedge funds? Will anyone want to buy dollars when they don't need them to repay dollar debt?
