Breaking news over a weekend is rare indeed, so the financial press is having great fun with the demise of now former Citigroup CEO Charles Prince, speculating over his likely replacement and possible futures for the financial giant.
Some are calling for a break-up, and news stories suggest that interim chairman Robert Rubin has long been pushing for a sale of slower-growth businesses like credit cards. It appears likely that Citi will have to sell some assets to shore up its thin capital base, and the timing, in the middle of the worst credit contraction in twenty years, is dreadful.
But the real news appears not to have gotten the attention it merits. Citigroup announced that it expects to make a further $8 to 11 billion of subprime related writeoffs, over and beyond the $5.9 billion included in its third-quarter results.
But get a load of this revelation from the Wall Street Journal:
Citigroup’s subprime exposure — and source of its problems — are two big buckets that together total $55 billion, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans that were being held, or warehoused, until they could be added to debt pools for investors. The second, totaling $43 billion, covers so-called super-senior securities.
Presumably, these numbers are post the $5.9 billion writedown but before the $8 to $11 billion one. Why are they so significant?
Compare them with Merrill’s. At the end of its second quarter, Merrill had $32.1 billion in CDOs, which is said were AAA (unclear as to whether “super senior” AAA) and its subprime exposure was $8.8 billion. Between a $6.9 billion writedown on its CDOs, a $1.1 billion writedown on its subprimes, and sales, it took its exposures down to $15.2 billion in CDOs and $5.7 billion in subprimes.
By contrast, Citi had bigger exposures and yet has done nothing to reduce its positions.
This is unforgivable, and it will have consequences. Let pro-rate a $10 billion writeoff across Citi’s dodgy positions. That would give us a remaining “super senior” book of roughly $35.1 billion, and $9.6 billion in subprimes. Citi has more than double Merrill’s exposure in structured mortgage paper, and almost double in yet-to-be packaged subprimes.
Further keep in mind that Merrill characterized its $15.2 million of CDOs as almost entirely AAA, but did not indicate that they were subprime related, although there was presumably some subprime exposure. The statement in the Journal, by contrast, indicates that all Ciits’ exposures are subprime-related. If they are “super senior,” by virtue of downgrades, they either aren’t or very soon won’t be AAA.
Bottom line: Citi has a considerably worse mortgage exposure than Merrill’s certainly in size, and likely in credit quality. And that is before taking account of any losses resulting from SIVs.
Analysts are predicting anywhere from another $2 billion to as much as $10 billion in further writeoffs for Merrill (consensus appears to be $4 billion). The quick and dirty analysis above says you should double that for Citi, before SIV-related hits.
In fact, the SIVs may be why Citi held on to this crappy paper when it should have dumped it. It would have required them to mark the prices down of any similar paper held in their SIVs, something they would be loath to do.
Update 11/6, 12:00 AM: A further pithy comment from the Financial Times’ Lex column:
The latest Citi blow contained three scary nuggets. The first is nobody really knows where the CDO debacle will lead. The complexity of valuing these things – not just how the cash from the underlying collateral gets divvied up but how the the default rates of the different securities correlate – was underscored by the $3bn range Citi attached to its potential hit. The second is that the scale of the mess could be even greater since there are many synthetic CDOs out there referencing the cash CDOs. Lastly, Citi added yesterday for good measure that all it had detailed was its direct exposure. Along with others, it may have offloaded credit risk to bond insurers. If those guarantees were to lose value, there could be a grisly end to this saga.