Showing posts with label Citigroup. Show all posts
Showing posts with label Citigroup. Show all posts

Tuesday, March 17, 2009

Credit Card Defaults at 20 Year High


The level of defaults are reaching a dangerous level. The big question right now--has the market already discounted this information? If not, a new leg down is coming after this consolidation.
U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP) and Citigroup (C) amid a deepening recession.

AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.

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U.S. credit card defaults rise to 20 year-high


By Juan Lagorio

NEW YORK (Reuters) - U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co (AXP) amid a deepening recession.

AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.

The credit card company's shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.

In addition, Citigroup Inc (C) -- one of the largest issuers of MasterCard cards -- disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.

"There is a continued deterioration. Trends in credit cards will get worse before they start getting better," said Walter Todd, a portfolio manager at Greenwood Capital Associates.

U.S. unemployment -- currently at 8.1 percent -- is seen approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists.

However, not all were bad surprises. JPMorgan Chase & Co (JPM) and Capital One reported higher credit card losses, but they were below analysts expectations.

Chase -- a big issuer of Visa cards -- reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. The loss rate for the first two months of the quarter is 126 bps from the previous quarterly average compared to an estimate of a 145 bp increase, Orenbuch said.

Capital One Financial Corp's (COF)default rate increased to 8.06 percent in February from 7.82 percent in January.

MORE PAIN AHEAD

Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.

"People underestimated the severity of the downturn we are experiencing and I wouldn't be surprised to see them north of 10 percent," said Todd, who added American Express was most exposed to higher credit card losses, given its sole reliance on the industry.

Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.

Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.

"We believe that the US credit card industry will feel additional credit pain over the next 12-18 months. Until lenders like Capital One show stabilization, followed by trend-bucking improvement over a several-month period, we will continue to remain bearish on credit card lenders," said John Williams, an analyst at Macquarie Research.

Todd said credit card issuers shares -- which are down up to 60 percent in 2009 -- will remain under pressure until the end of 2009, or early next year, when bad loans could start to redeem.

(Reporting by Juan Lagorio, editing by Bernard Orr)

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Monday, February 23, 2009

Stress Test for Banks the Best Medicine


There are growing doubts about banks and there can be little doubt we are on the edge of a "run on banks". Bank of America and Citigroup are at the top of the lists. I have to admit, I have an account at both banks--yikes.

As doubt and angst grows , the Obama administration is announcing that a review of 20 major banks is forthcoming. This review of banks is often known as a stress test. Stress testing has a lot of people worried. They reason that stress testing will likely scare the heck out of investors. If Nouriel Roubini is right this will leave no choice but to nationalize. Roubini, who coined the term Zombie bank, has been saying for sometime that the banks are broke. I don't think there is much doubt that if all assets were marked to the market this would prove to be true.

One problem with pricing toxic assets and distressed assets in banks is that no one knows the real price. The system is basically frozen with little trading taking place. Sooner or later, something has to to give.

Toxic assets, nationalization, Zombie bank, these are all terms that are hanging over banks like a tornado cloud just waiting to touch down.

What do I think? Let's get it all out in the open. Obama is taking heat from the likes of Bill Clinton for being too pessimistic. I think the American public is very pessimistic. Markets don't go up when investors are uncertain or pessimistic. The only way out of this trap is to bring it all up on to the table and let us take a look at this ugly situation.

My guess is that once the true extent of the problem is known it will be quickly discounted in the stock market. Once that occurs we can go about solving that problems instead of letting the problems hang out their like an impending guillotine over our heads.

The market is going down until it fully discounts the economic problems we are facing. For me, the sooner it happens the better. I am starting to feel very bullish long term on stocks (still very bearish short term). But, I learned a long time ago that you make a lot better returns in the stock market when times are certain, rather than uncertain. Who wants to stand in front of a roaring freight train--not me.

I get the feeling that President Obama is going to let it all hang out. I bet he will receive lots of criticism from people suffering from Rick Santelli syndrome--better know as the "ignorance is bliss syndrome". Many are going to attack President Obama for telling too much. Well I think he said he intends to make things transparent. It is time for us to get our heads out of the sand and get back to doing the kinds of things that made America great. Get out the spoon--we all need a great big dose of Castor oil.
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U.S. bank stress tests to show capital needs: source

By David Lawder

WASHINGTON (Reuters) - Financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks should get bigger capital cushions in case of a deeper recession, a person familiar with Obama administration plans said on Saturday.

The person, speaking on condition of anonymity, said if institutions were found to need additional capital, financial authorities would provide them with an "extra cushion of support."

Banks are expected to receive additional information about the tests in the coming week from regulators.

The largest U.S. banks are "well capitalized" for current conditions, the source said, but the Obama administration wants to ensure they can withstand a more severe economic climate and play an important role in helping restart the flow of credit.

Initial plans for the stress tests were announced on February 10 as part of Treasury Secretary Timothy Geithner's bank stabilization plan, but the source on Saturday for the first time linked the tests to additional government support for large banks. That person did not specify what form any extra capital cushion may take.

Little is known about the form of the stress tests, but the person described them as "consistent, forward looking and conservative."

The Obama administration tried on Friday to ease market fears the government was poised to nationalize some large banks that are struggling with losses and a lack of confidence, notably Citigroup and Bank of America.

Bank shares fell sharply, with Citigroup plunging 22 percent to below the $2 fee of a typical automated teller machine, or ATM, and Bank of America trading around the $4 level.

White House spokesman Robert Gibbs said on Friday, "This administration continues to strongly believe that a privately held banking system is the correct way to go."

That was quickly echoed by a statement from the U.S. Treasury.

INVESTORS LOSE CONFIDENCE

Citigroup and Bank of America have each received $45 billion in government capital in recent months and guarantees against losses on portfolios of illiquid mortgage assets -- aid that now exceeds their market value.

With investors losing confidence in the sector as recessionary losses on real estate and commercial loans mount, analysts say the government may have to do more to prop up the largest banks.

But rather than opting for a sweeping takeover, the government may act more incrementally, demanding a little more control every time Bank of America or Citigroup seeks more capital, analysts said.

Major interventions in financial institutions, such as Bear Stearns 11 months ago, American International Group in September and a second-round investment in Citigroup, occurred just after major drops in share prices made it clear they could not raise private capital.

The government "will try to do everything they can before they nationalize banks, but they may ultimately do it," said Lee Delaporte, director of research at Dreman Value Management, which has $10 billion under management.

"The bank stocks are telling you nationalization is going to happen," Delaporte added.

Thus far, the Treasury has put up about $235 billion for banks largely by purchasing only preferred shares to avoid diluting common shareholders. Under Geithner's revamp, those injections could come in the form of shares that could be converted to common equity if necessary.

The lack of detail in Geithner's bank plan, particularly about a $500 billion to $1 trillion public-private fund to soak up toxic assets, has fueled investor concerns that bank takeovers could become an option. Geithner did not specify how much money would be earmarked for bank capital injections under the plan, which mapped out how the second $350 billion of the $700 billion bailout fund would be spent.

Geithner has devoted $50 billion to modify troubled mortgages and $100 billion to support a $1 trillion Federal Reserve asset-backed securities lending facility aimed at unblocking frozen consumer credit markets.

Lawmakers have pressed Geithner on whether and when he will return to seek more funding to shore up the banking system. Geithner told Congress on February 11 that as the "design elements" of his plan were fleshed out, he would have a better handle on the ultimate risks and costs for the program.

(Additional reporting by Dan Wilchins in New York; Editing by Peter Cooney)

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Bailout Nation: U.S. May Draw Citi Into Tighter Embrace


Bank nationalization is hanging over the market. But as far as taxpayers go the last thing we want is common stock. The reverse should be happening: common stock holders and existing debt holders should be getting crammed down in any reorganization that includes bailout funds, that is, taxpayer dollars.
Fears that Citigroup would succumb to the fate of American International Group and be outright nationalized sent its stock into a tailspin last week, ending Friday at a paltry $1.95. That gives Citi a market capitalization of just over $10 billion. One year ago, it had a market value of over $137 billion, and even that was considerably less than in Citi's glory days.

Though the deal believed to be under discussion would incur no additional costs to taxpayers, it would hammer common stockholders. News reports Sunday evening had the bank, either voluntarily or at the behest of the government, converting preferred shares held by the government into common shares, which would dilute existing stockholders. The government could end up holding 40% of the company's equity.

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U.S. May Draw Citi Into Tighter Embrace

For the third time in four months, Citigroup is looking for government help to shore up its capital.

The question is whether more government involvement above and beyond the $45 billion the bank has already taken in two installments in October and November, not to mention the guarantee against losses on $300 billion of assets, would do anything to restore confidence.

Fears that Citigroup would succumb to the fate of American International Group and be outright nationalized sent its stock into a tailspin last week, ending Friday at a paltry $1.95. That gives Citi a market capitalization of just over $10 billion. One year ago, it had a market value of over $137 billion, and even that was considerably less than in Citi's glory days.

Though the deal believed to be under discussion would incur no additional costs to taxpayers, it would hammer common stockholders. News reports Sunday evening had the bank, either voluntarily or at the behest of the government, converting preferred shares held by the government into common shares, which would dilute existing stockholders. The government could end up holding 40% of the company's equity.

Citigroup wouldn't comment on the reports, except to reiterate a statement it made last week when the nationalization rumors were making the rounds. "Citi's capital base is very strong and our Tier 1 capital ratio as measured at the end of the fourth quarter was 11.9%, among the highest in the industry. We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," a spokesman said.

Citi, reeling from $18 billion in losses for 2008 and massive exposure to the consumer loan market, is already in the process of splitting itself in two. It's taking more than $800 billion of unwanted assets and businesses, like mortgage lending and consumer finance, and segregating them in a new business unit with its own management, who will spend their time selling the assets or otherwise disposing of them.

It also sold a majority of its crown jewel, Smith Barney, to a joint venture with Morgan Stanley.

The rest of Citi, which is returning to its pre-1998 name Citicorp, will continue on and presumably perform better without those money-losing assets and noncritical businesses. The remaining businesses will include corporate and retail banking, private banking and wholesale services around the world.

Announcing the plan in January, CEO Vikram Pandit explained, "This new structure will provide a wide range of options going forward to continue strengthening our core franchise."

But Citi faces a stress test by the government, and the results might not be pretty. Like many other banks, Citi faces mounting consumer loan losses, which are only being exacerbated by rising unemployment.

The stress testing, which is mandatory for the 15 biggest U.S. banks with more than $100 billion of assets, begins in the coming weeks. The Treasury Department, which is running the program, wants to find out whether the banks would have the capital they needed to continue to lend and absorb more losses if the economy were to weaken more than expected. Some think this stress testing, which is part of the Treasury's new Financial Stability Plan, means the government is imposing stricter capital standards on banks.

The fear is that any testing scenario will create a situation where there are clear winners (banks that don't have to take additional capital from the government but will likely be forced to anyway in a "voluntary" program to give the plan legitimacy), and clear losers (banks that will get capital injections that come with all sorts of additional restrictions on executive compensation, among other things).

Banks that go through a stress test will get access to a Treasury-provided "capital buffer" (an additional preferred equity stake) to bridge the time until the bank can raise the capital on the private markets. Given the restrictions that will likely accompany additional government injections, most see banks favoring raising capital in the private markets, if at all possible.

Citi has a number of wealthy constituents backing it, including Saudi Arabia's Prince Alwaleed bin Talal, whose fund has taken a major hit in the last few months. Other investors include the Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation and the Kuwait Investment Authority. Some executives at Citi get stock awards that vest if the stock improves by a multiple of three in the next four years. Pandit, along with some other senior executives, didn't participate in the awards.

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Sunday, February 22, 2009

Zombie Bank Defined and Discussed


A Zombie Bank refers to a bank with a net worth which is less than zero, but which continues to operate because of implicit or explicit government guarantee.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.--Paul Krugman
In the continuing series on the lexicon of financial misfortune, Morning Edition introduces the term "zombie bank." A zombie bank keeps draining bailout capital from the government but doesn't respond with any meaningful lending that helps the economy recover. The prevalence of zombie banks made the long Japanese recession of the 1990s especially painful. --Zombie Banks Feed Off Bailout Money/NPR/Listen
The global recession manifests itself in big and small ways, most gloomy, some quirky and often reflecting the inventive human spirit. Here is a look at some signs of the times.--Zombie banks return
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Wall Street Voodoo



By PAUL KRUGMAN
Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.

Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?

Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price.

A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?

In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.

Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.


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Crafting a Bank Plan...No 'Lehman Weekends'


As I mentioned previously, Steve Liesman is one of my favorites. He has a good article up on the current government posture toward banks.
New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.
Officials say there will also be some information about the “capital-access program” that will explain how banks can obtain government capital in the event of worst-case economic scenarios. Separate details of the public-private partnership will also be made available soon, but the timing is less clear.

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Crafting a Bank Plan...No 'Lehman Weekends'



While markets appear to be waiting for the hammer of government to come crashing down on the nation’s two largest banks, several government officials in interviews with CNBC on Sunday described a process in the works that is far more deliberative.

Some details will be made available this week, but parts of the plan will take weeks, months and even more than a year to play out as the Obama administration puts together a program that they hope will return banks to long-term health.

What is clear is that they are specifically trying to avoid “Lehman Weekends,” referring to the furious efforts in September when Lehman Bros. went bankrupty and AIG was bailed out. Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.

Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.

Officials would not rule out increased or even outright government ownership of large banks at the end of the process, but they say their intent is to avoid that outcome and that it is anything but certain. They say the government does not want to be running these companies.

If the banks end up in government hands, officials say, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies, which typically take place over the weekend. The extent of government ownership, they say, will depend on the size of the losses at the banks, the access of banks to private capital and how the recession plays out.

Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Several officials conceded that they have done a poor job in explaining the process to markets and that markets have, understandably, spun the darkest possible outcomes in the absence of information.

New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.

Officials say there will also be some information about the “capital-access program” that will explain how banks can obtain government capital in the event of worst-case economic scenarios. Separate details of the public-private partnership will also be made available soon, but the timing is less clear.

The key misunderstanding in markets, officials believe, is how the public-private partnership will work and the way that new government capital, in the form of mandatory convertible preferred shares will become common equity.

One official said the public-private partnership will be voluntary so there will not be no mandate that banks offload assets at a loss. The official added that additional government capital will go into the banks as mandatory convertible preferred. Those shares remain preferred until realized losses and capital needs trigger conversion to common. As a result, the official said, the government may end up with a large stake in a given bank over a period of time, but it wont’ happen overnight.

As Wall Street braced for the worst, Bank of America lost 32 percent last week, closing at $3.79, a more than 24-year low.

Citigroup tumbled 46 percent last week to end at $1.95, an 18-year low.

Slideshow: Bank Failures of 2008

© 2009 CNBC, Inc. All Rights Reserved
URL: http://www.cnbc.com/id/29332236/

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Tuesday, February 03, 2009

Citigroup Leads Hybrid Bond Drop on Bailout Concern


Citigroup Leads Hybrid Bond Drop on Bailout Concern
(Bloomberg) -- Bond investors’ bets on bank nationalizations are hindering already reduced lending by the world’s biggest financial institutions.

The market for securities with characteristics of both debt and equity that Citigroup Inc., Bank of America Corp. and other financial companies used to bolster their capital is in freefall on concern governments will stop banks that took public cash from paying interest. The hybrids, which typically count as regulatory capital to cushion against losses, fell 11 percent last month in the U.S., more than they did in all of 2008, according to Merrill Lynch & Co. index data. Citigroup and Bank of America bonds lost as much as 34 percent of their value.

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