Sunday, November 23, 2008

Bank Accounting

"Deutsche Bank AG, helped by a change in the way European banks book souring assets, posted a profit in the third quarter even as in-house trading bets in the stock and credit markets led to third-quarter losses totaling Euro 1.3 billion ($1.68 billion). ... A change this month by European accounting policy makers allowed banks to move souring loans to their hold-to-maturity books, limiting write-downs that would have resulted from valuing the assets at market prices", Carrick Mollenkamp at the WSJ, 31 October 2008.

"The new chief executive of Royal Bank of Scotland Group PLC said there are no 'sacred cows' when it comes to paring the global bank's balance sheet and reducing its risk as part of a turnaround strategy. ... The bank has hired McKinsey & Co. to advise and weigh each business against a variety of factors, such as returns, risk, market share and customer base", Sara Munoz and Carrick Mollenkamp at the WSJ, 7 November 2008.

"Investors were rattled by [Citigroup's] announcement that it will buy the last $17.4 billion in assets held by its structured investment vehicles, which were among the first casualties when the credit crunch hit last year. ... As Citigroup's stock fell Wednesday, executives instructed traders, financial advisers and other employees to reach out to key clients to reassure them about the company's health. ... Tanya Azarch's, a credit analyst at Standard & Poor's, says the federal government had made a 'broad expression of support.' ... 'As we're watching the deterioration here of the market ... it makes us think that the mark-to-market writeoffs are not over yet,' she adds. Such write-offs, which reflect the dwindling value of assets Citigroup is holding, have already cost Citigroup tens of billions of dollars this year", David Enrich at the WSJ, 20 November 2008.

"The market is losing confidence in Citigroup. In the wake of some planned balance-sheet maneuvers, it isn't tough to see why. ... Largely overlooked in presentation materials released to investors was a disclosure that this quarter the firm would reclassify about $80 billion in assets. Those assets wouldn't have to be marked to market prices. Or they could be be held in way that keeps losses from hitting earnings. ... Mr. Pandit's rationale for the move: The assets could eventually bounce back in value. Investors have heard that one before and don't believe it. If anything, the move has only made investors more skeptical about Citigroup's ability to withstand mounting losses. The bank says its sufficiently capitalized", David Reilly at the WSJ, 20 November 2008.

"With even the largest vessels now vulnerable to pirates, these are dangerous times for shipping. The same goes for financial supertankers such as Citigroup. ... Dozens of new managers have been brought in, some of them old colleagues of Mr. Pandit's from his days at Morgan Stanley. Risk management has been spruced up. Treasury has been centralised, to ensure that capital is allocated more efficiently. ... The big question is whether Citi, which has already raised $75 billion in equity, a third of it from the government, will need more. ... And Citi may yet have to bring a portion of its $1.2 trillion in off-balance-sheet assets onto its books under proposed accounting rules. ... Though the American government would not allow Citi to fail, the idea that it will need further state support, or will need to be rescued by another bank, no longer seems fanciful", my emphasis, Economist, 20 November 2008, link:

"Citigroup hopes the government makes a public expression of confidence in Citigroup that would help reassure clients and customers. Mr. Pandit told employees that Citigroup has 'a fantastic business model.' But executives haven't ruled out a possible sale or breakup of Citigroup if there is no alternative, according to people familiar with the matter", David Enrich at the WSJ, 22 November 2008.

Quoted without comment.

I applaud Royal Bank's move but wonder: what was it doing all along?

Things go from bad to worse at Citigroup. On 7 July 2008 "C" was $17.34; on 20 November 2008, $4.71; a 73% decrease in 4.5 months. Great work $800 million man.

Yes, Uncle Sam will keep Citi afloat, no matter what. I ask the question I've asked before: what kind of cost accounting did Citi have that now it's improving its risk management and capital allocation process? What was its prior management being paid for?

That Citigroup's $800 million man thinks he needs government expressions "of confidence", tells me Citigroup is insolvent. Absent further bailouts, Citigroup is finished.

Citigroup been singing this song for months. See my 7 and 17 July 2008 posts:


Printfaster said...

I don't get it. Why are we funding the rescue of big banks. There is no reason to keep them alive.

Everywhere I look, there are always plenty of people ready to start up a bank so that they can print money. There is no shortage of banks, and unlike the auto industry, starting a bank requires no industrial capital, and startup is virtually instant. There are plenty of international banks ready to step in to buy the branches.

What is really going on with the bank rescues? I don't understand the hurry.

The only explanation that I can come up with is that the federal government needs GoldmanSachs to market treasury trash. The equation is that if Goldman fails, the treasury fails. Nothing else makes sense.

Anonymous said...

"What is really going on with the bank rescues? I don't understand the hurry."

Incest. It's called counterparty risk, these banks have been swapping spit for years. The problem is in the shadow banking derivatives market. One bank goes down it takes all the others with it and the ponzie scheme of fractional reserve banking with no reserves collapses along with the defaulted debt.

Anonymous said...

Bank accounting = fairy values...


Printfaster said...

To Anon
I still don't understand why anyone cares if the big banks fail. All of them. FDIC takes care of the little guy, but frankly, who cares about the "accredited investor"?

There is an enormous amount of lamentation for the big banks, but all I see being lost is the bank deposits of those raking in multimillion dollar bonuses, and foreign banks that I frankly care squat about.

It seems to come down to the failure of big banks means loss of appetite for treasuries.

Printfaster said...

Oh yes, one more thing. What really annoys me about the bank rescue is that it did not come with a receiver being appointed to run the bank. The big banks are hiding fraud and appointment of a receiver would expose the rot.

Time for the elimination fat salaries, closing posh offices, relocation of headquarters to Fargo, fancy restaurant meals, and firing squads of minions. I would be in support of taking back previous bonuses since I consider them fraudulent.

A government rescue with the idiots still ensconsed in NYC is really annoying.

Ain't gonna happen since all the politicians in DC and Albany suck from the same monster teats.

Anonymous said...

'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.'
Thomas Jefferson 1802

cap vandal said...

People are now talking about letting Lehman fail as one of the huge mistakes of 2008. It was sort of like a little demo of an atomic bomb -- and it convinced me that these firms are really too big.

It isn't even the 1,000 things you think would be hurt, it is the other 1,000 that can't take a hit. By that, I mean the other financial firms that have bonds and preferred stock in C and BAC, for example. With the entire global system under stress, a big hit from a C default would require huge amounts of cash be injected into lots of other banks.

When Lehman failed, people all over the world discovered that they had LEH bonds or synthetic bonds or some other exposure.

If you could do a rerun, then I would love to see what just letting C fail would do. Unfortunately we will never know.

We can't rule out a replay of the 30's, but no one is going to just let it happen without putting up a fight.

cap vandal said...

It isn't just banks. It's pension funds, insurance companies, financial components of non financial firms, etc.