The Economy Guy

Here’s what the news said about it.

Citigroup Inc. said late Monday that it has reached an agreement to sell equity units with mandatory conversion into common shares to the Abu Dhabi Investment Authority in the amount of $7.5 billion.
“This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business,” Acting Chief Executive Win Bischoff said in a statement.  The Abu Dhabi Investment Authority has agreed not to own more than a 4.9 percent stake in Citi and will have no special rights of ownership or control and no role in the management or governance of Citi, including no right to designate a member of the company’s board of directors.  The Abu Dhabi Investment Authority will receive units that will be convertible into Citi shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.  The investment was expected to close within the next several days.  The Abu Dhabi investors will receive a 11% return, plus the conversion rights.

Here is what I think about this.  Citibank is trying to reassure everyone who will listen that it has lots of money now, so “don’t worry, be happy.”  I say – “You’ve got to kidding!!!”  Citibank is borrowing money at 11%.  What type of investment is that????  If you borrow money at 11%, and lend it out at prime (7.5%), then you LOSE MONEY.  This is a great way for Citibank to go under.  What genius came up with this idea???  If Citibank invests its money to get a greater than 11% return, it will incur a greater risk – and this looks like a downward spiral for the bank.

Here is another story with Citibank.

Calls for more transparency at Citigroup Inc. grew louder Monday when HSBC Holdings PLC said it would put two funds with mortgage exposure on its balance sheet and spend $35 billion to bail them out. Citigroup said it has no plans to mimic HSBC’s move. So far, Citi has committed $10 billion in liquidity to the seven structured investment vehicles it manages on an “arm’s length” basis, and has kept them off its balance sheet — meaning Citi has not been counting the SIVs’ debt as its own.  The seven SIVs have, in total, about $83 billion in assets.

Here is my interpretation of Citibank’s accounting decision.  While it is legal (?) to have an SIV “off balance sheet”, most other banks have chosen to have them ON their balance sheet?  Why???  Transparency.  Investors can see what’s going on, financially, that way.  Citibank has chosen to hide its exposure to its $83B SIVs.

That strategy may end up backfiring, though, some industry watchers say, because shareholders, fed up with remaining in the dark about how much risk the largest U.S. bank holds, are selling their shares off.
SIVs, which JPMorgan Chase & Co. CEO Jamie Dimon recently predicted, will “go the way of the dinosaur,” and have hit snags this year. The vehicles sell short-term debt, such as unsecured commercial paper, to investors such as hedge funds, then use the proceeds to buy longer-term assets, like mortgage-backed securities, that yield richer returns.  SIVs normally generate money through fees and the difference between short-term and long-term rates. But demand for short-term assets has vanished in the midst of the U.S. housing market implosion, creating liquidity problems for the vehicles.

The other markets stayed on cue.  Most went sideways, but Oil took a big dip in price as there was a big concern that the US economy may be heading south.  I’m happy to see that logic and reason sometimes works in the commodities markets.  A slower US economy spells lower prices for commodities – generally speaking.  There are rumors that OPEC are increasing (or going to increase) oil production.  I’ve watched OPEC enough to know that they “cheat” whenever it suits them, and there is no real watchdog to say how much oil is really being pumped at any given time.