Monday, March 17, 2008

Debt Rattle, March 17 2008

Bear Stearns building, Manhattan, valued at 5 times the price of its owner

Ilargi: If Meredith Whitney is right, and finance stocks will lose 50% more, and James Turk is also right, that Citigroup is leveraged 41.6 times, then there's only one possible conclusion: this whole thing has only one way to go from here.

That "level of leverage" means that the big banks and funds simply can't afford to lose half of their stock value; it will finish them off, 100% sure. It would put Citi at over 80% leverage. That's what we're looking at today.

Meredith Whitney: Financial Stocks To Lose 50% More
Financial stocks have further downside of as much as 50 percent, based on multiples of tangible book value, Oppenheimer & Co. analyst Meredith Whitney said in a note to clients on Monday. Whitney noted that JPMorgan Chase & Co.'s buyout of Bear Stearns for $2 a share, or only 2 percent of the stated book value at the end of the fourth quarter, is unique.

What will not be unique, she said, "is a resulting major negative revaluation of financials." When based on tangible book value, banks look expensive, Whitney said. "As we believe we will begin to see goodwill writedowns during the first half of this year, we believe investors will focus more on tangible book value and stocks will quickly revalue to far lower levels," she wrote.

Financial stocks tumbled Monday on news of the Bear Stearns buyout and on rising fears that other banks could suffer the same fate. Shares of Goldman Sachs, which Whitney rates at "Perform," plunged $11.98, or 7.6 percent, to $144.88. Bank of America Corp. shares, also rated at "Perform," dropped 22 cents to $35.47. Citigroup Inc. shares, rated at "Underperform," fell $1.40, or 7.1 percent, to $18.38.

Stunned Bear Stearns investors eye legal claims
Angry Bear Stearns Co Inc shareholders have wasted no time in calling their lawyers to pursue potential legal recourse over the company's $2-a-share fire sale to JPMorgan Chase & Co. "I can't divulge privileged conversations, but shareholders don't contact me when they are happy with the way things are going with their investments," said Ira Press, a lawyer at class-action firm Kirby McInerney, which has spoken with dismayed Bear investors about the matter.

"This is a stock that has gone from 50 to 2 literally overnight, and I also know of people who had assumed that the worst had passed when it closed at 30," he said. Bear Stearns, one of the most venerable names on Wall Street, is being sold for just $236 million in an emergency deal backed by the U.S. Federal Reserve in a sign of the deepening credit crisis.

The deal's value is more than 90 percent below the company's Friday closing share price of $30.85. But JPMorgan said the total price tag would be $6 billion to account for litigation and severance costs. Investors have barely had time to digest the news, but are already exploring possible legal avenues, say plaintiffs' lawyers who specialize in suing large corporations.

"We've been contacted by large individual investors and institutional investors," said Jeffrey Nobel, a partner at class-action law firm Schatz Nobel Izard. "Suffice to say, we are certainly looking very carefully at it." Shareholders might sue Bear and its executives and officers for securities fraud, contending they failed to disclose the company's true financial health, lawyers say.

Nobel said his firm has been contacted by investors who bought the stock as recently as last week. Some of these buyers, he said, took their positions after Bear CEO Alan Schwartz said in a televised interview on Wednesday that the company does not see any pressure on its liquidity and had about $17 billion in excess cash on its balance sheet.

"You have investors who are upset because they feel as though the company was not truthful in reporting its financial condition," Nobel said. Other suits may be brought by Bear employees who hold company shares that are now virtually worthless, lawyers said.

Another possibility are lawsuits challenging the fairness of the deal and whether there are other potential bidders who might pay a higher price, though these suits may have a tough time succeeding because Bear was clearly in dire straits when it agreed to the weekend deal and may have had no other options besides bankruptcy, lawyers said.

What’s in Your Black Box?
Bear Stearns was the #5 broker-dealer. It’s 14,150 staff (who own a higher proportion of the bank than any other Wall Street firm) will be particularly hard hit. 35% of all wages and salaries in Manhattan are from financial firms.

Insiders at Bear Stearns, including directors and employees, own 38.7% of the bank’s shares according to Thomson Financial. They will receive around $90m for their shares under the terms of the acquisition by JP Morgan Chase, compared with $5.3bn when the shares were trading at $100 in December last year.

Other big losers from the collapse of Bear Stearns…include Joe Lewis, the secretive British billionaire, who has lost an estimated $1.16bn on the stake he built up in Bear Stearns last year. He bought 11 million shares last year at an average price of $107m, worth $1.18bn, according to regulatory filings. His stake will be worth just $22m under the terms of the sale.

Institutional investors who have been hit by the collapse – based on regulatory filings as of the end of December 2007: Morgan Stanley with 5.4%, Legg Mason with 4.8%, Private Capital Management with 4.7%, Barclays Global Investors with 3.6% and State Street Global Investors with 3.0%. China’s biggest firm, Citic also bit off a quick billion dollar loss.

This one has counter-party blowup written all over it. This is the end game of crazy scientists working in the lab on Frankenstein creatures. It has been lied about and covered up for so long, that it has to be absolutely ugly a sin. The Fed’s response is to open up the windows for just about everybody to borrow, using about anything as collateral to borrow, to try and paper over about anything that has already blown up or is about too.

It’s just too bad they are clueless about what’s in the black boxes on the lab table. We are quickly being reduced to one (the last?) remaining Berserker and Risklove, the Fed, and their $700 billion portfolio of Treasuries built up over a century. Compare that to just BSC derivative exposure in the chart above. Berserker monetary responses can really do one thing now, cripple the currency, and destroy the US economy. All to save Pig Men, Berserkers, and Riskloves from themselves. But even now, the conventional wisdom has faith in this rabble to be able to save the day.

“Most lending happens outside of bank balance sheets,'’ said Mark Gertler, who has written papers on central banking with Bernanke and is a professor of economics at New York University. “We are seeing financial innovation, so you should expect innovation in the lender of last resort facility.'’
What’s in your black box?

Oil prices plunge on concerns that the crisis facing Bear Stearns will widen
Oil prices fell sharply Monday, pulling back at least temporarily from record levels as investors feared that the financial crisis that forced the sale of Bear Stearns Cos. is a sign of deep economic troubles.

Oil's steep decline Monday came hours after futures rose to a new trading high near $112 (U.S.) a barrel on the Federal Reserve's surprise Sunday move to lower a key interest rate by a quarter point. In the past several months, Fed rate cuts have fuelled rallies in oil prices.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Interest rate cuts, and even the prospect of future cuts, tend to weaken the dollar further. But the mass selling Monday — despite the Fed's Sunday rate cut, the prospect of another cut at the Fed's regular Tuesday meeting, and the fact that the dollar dropped to new lows against the euro on Monday — could be a sign that the oil market's momentum has turned negative, analysts say.

“People are saying, well, things are a lot worse than we thought,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. Light, sweet crude for April delivery fell $3.08 to $107.13 a barrel in morning trading on the New York Mercantile Exchange. Overnight, prices rose as high as $111.80 before plunging as low as $105.11 in early morning Nymex trading.

After Bear Stearns Rescue, Who's Next?
With a deal in place to save Bear Stearns from bankruptcy, the company's shares traded above the offer price Monday even as investors began turning a critical eye to other investment banks amid worries about how far the credit contagion could spread. Despite the weekend deal in which JPMorgan Chase & Co. bought Bear Stearns for a fraction of its value last week, worries that other banks had sizable exposure to troubled credit markets sent global markets tumbling. Wall Street managed to rally from sharp losses Monday as investors went bargain-hunting.

A complete collapse of Bear Stearns might have completely crushed the already-dwindling confidence in the global financial system, which has frozen up after last year's collapse of the subprime mortgage market. Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse. But the fact that a major investment bank could reach the verge of buckling — and be sold at such a discount — sent dismay through Wall Street and beyond.

"One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday," said Deutsche Bank analyst Mike Mayo. The financial industry wants to know exactly how badly Bear Stearns bet on mortgage-backed investments. Unwinding the nation's fifth-biggest investment houses should provide some insight into what other financial institutions might have on their books.

And with Bear Stearns seemingly gone, investors pondered who might be next. Lehman Brothers Holding Inc. stock lost 21 percent Monday, following a 15 percent drop on Friday amid concerns it might be having similar liquidity issues. Lehman Chief Executive Richard Fuld denied Monday that the firm was having liquidity problems.
Bear Stearns shares fell $26.26, or 87.5 percent, to $3.74 — above the shockingly low price of $2 per share that JPMorgan Chase is paying — while JPMorgan rose $2.88, or 7.8 percent, to $39.39. UBS AG, hit hard by the same type of write-downs for mortgages that felled Bear Stearns, dropped more than 14 percent in Zurich.

JPMorgan announced Sunday night that it would acquire Bear Stearns for $236.2 million in a deal that was fast-tracked by the federal government to avoid a bankruptcy. The price represents roughly 1 percent of what the investment bank was worth just 16 days ago.

Central banks scramble to stem the bleeding
The global credit crunch has now become a full-blown and rapidly deepening financial crisis that central banks are scrambling to contain, analysts say. With the U.S. Federal Reserve taking more extraordinary measures over the weekend to mitigate the crisis and set financial institutions on a more stable footing, markets are on edge, with a wary eye on the U.S. dollar, financial stocks, and credit conditions around the world.

“It is very important for everyone to understand that we are making the transition from crisis prevention to crisis management,” said David Rosenberg, chief North American economist for Merrill Lynch. The Bank of England also moved quickly Monday morning, offering £5-billion in three-day securities to grease the wheels of the British banking system. Now, there's talk that the U.S. Fed will move on Tuesday to cut its key interest rate by a massive 100 basis points — a full percentage point.

At the same time, currency analysts are closely watching the weak U.S. dollar, and talking about the need for a co-ordinated intervention to prop up the currency. “There is a clear loss of confidence in the market and the Fed has essentially very little left it can do,” currency analyst Camilla Sutton at Scotia Capital Markets wrote in her morning note. “It has agreed to provide liquidity and it has aggressively (and will continue to aggressively) cut the overnight rate.”

Still, she, like other analysts, feared that the panic that undermined Bear Sterns will spread to other major brokerages — a fear that was reflected in stocks such as Lehman on Monday morning. “What we are learning first-hand is that the Fed can't solve all of the world's problems,” said Mr. Rosenberg in an analysis.

Economists are now second-guessing their assumption that a recession in the United States would be shallow and short-lived, and are now warning about a longer slump that can't simply be fixed by steep interest-rate cuts.

"New world order," buyers seen for banks: CreditSights
Financial firms face a "new world order" after a weekend fire sale of Bear Stearns and the Federal Reserve's first emergency weekend meeting since 1979, research firm CreditSights said in a report on Monday. More industry consolidation and acquisitions may follow after JPMorgan Chase & Co on Sunday said it was buying Bear Stearns for $236 million, or deep discount of $2 a share, a fraction of the $30 price on Friday and record share price of about $172 last year.

"Last evening the Bear Stearns situation reached a crescendo, as JPMorgan agreed to acquire the wounded broker for a token amount of $2 per share," CreditSights said. "The reality check is that there are many challenged major banks, brokers, thrifts, finance/mortgage companies, and only a handful of bonafide strong U.S. banks.

CreditSights said it lowered its broker, bank and finance company recommendations to "market weight" due to the credit crisis and stresses in the market. In the event of future consolidation, potential acquirers identified by CreditSights include JPMorganChase, Wells Fargo, US Bancorp, Goldman Sachs and Bank of America, once it works through its recent agreement to acquire Countrywide Financial Corp., the largest U.S. mortgage lender.

Possible foreign bank acquirers include HSBC, Barclays and Canadian firms, said CreditSights, which said the Bear Stearns deal should be good for bondholders. "The debt side whether at the parent level or on the broker/dealer levels seems to be in rather good shape with the capital structure to be assumed by JPMorgan at deal close," which is expected in about 90 days, CreditSights said.

Fed wades further into risky waters
The U.S. Federal Reserve is taking a risk by opening up its own balance sheet to the same poisonous securities that have strained banks to the limit. But the risk of doing nothing is far greater. The central bank seems to be wading further into shark-infested waters by the day as it looks to shore up a blighted credit market that threatens to prolong the pain for a U.S. economy that many analysts fear is already in recession.

Analysts said risks to the U.S. financial system approaching those seen during the Great Depression forced the Fed's hand. "The U.S. financial system probably is under more strain now than for at least several decades. Let's hope (the Fed's) determined efforts eventually get 'traction,'" said Rory Robertson, analyst at Macquarie Bank in Sydney. The last time the Fed lowered rates in an emergency move, in January, it was at the beginning of the New York business day and came in the form of an unexpected three-quarter point cut in the benchmark federal funds rate.

With the crisis now accelerating, policy-makers, who hold a regularly scheduled policy meeting on Tuesday, clearly felt they could not wait. While the intent was to keep financial markets functioning, the side effect is increased exposure to the mortgage-backed securities that have left gaping holes in banks' balance sheets and constrained lending to the companies and consumers that propel the U.S. economy.

"Ideally they're trying to minimize the risk but even risks that are prudently minimized are still risks," said Michael Feroli, U.S. economist with JPMorgan in New York. "As with discount-window lending, there's always the possibility that the institution fails and the collateral is worth less than you hoped, and then you take a loss."

The Fed's balance sheet lists assets of $869 billion, of which $709 billion are Treasury securities held outright.
Feroli said the Fed was unlikely to need more cash because its so-called discount window, where it lends directly to banks, has built-in layers of protection. First, the central bank lends only to primary dealers, the big names in the financial world. That means the risk of an outright failure is minimal -- although Bear Stearns' swift demise serves as a reminder that it is not unheard of.

Second, the Fed assigns a "haircut" or markdown to securities pledged as collateral, which means they would have to shed significant value before the Fed felt the loss. "Ultimately if there is a credit risk it gets borne by the taxpayers because the surplus returned to Treasury would be lower," Feroli said. "In a roundabout way the taxpayer has to bear that."

Fed takes emergency steps to prop up bank funding and calm nerves on Wall Street
In a rare intervention on a Sunday evening, the Fed said it was cutting the discount rate on its loans to banks by a quarter of a percentage point to 3.25%. Furthermore, the central bank said it was setting up a new lending facility for primary dealers on the financial markets. "Liquid, well-functioning financial markets are essential for the promotion of economic growth," the Fed said.

The US authorities are alarmed at the prospect of Bear Stearns' difficulties sapping already shaky confidence among market participants. There was a sense of shock at the speed with which one of Wall Street's biggest brokerages lurched to the brink of collapse. Such is the level of official concern that the Fed agreed to stand behind $30bn (£14.8bn) of Bear Stearns' liabilities in order to persuade JP Morgan Chase to rescue the 85-year-old firm.

Described as "less liquid assets", these liabilities amount to most of Bear's $33bn in exposure to mortgage-backed securities - including $2bn of positions in sub-prime home loans. On a conference call, JP Morgan's chief financial officer, Mike Cavanagh, said his firm had needed this reassurance before bailing out Bear Stearns. "In doing our due diligence, one of the areas we needed comfort on was some of these illiquid assets on their balance sheet," said Cavanagh.

The deal, which will take 90 days to complete, is contingent on approval from shareholders in both firms. But JP Morgan's head of investment banking, Bill Winters, said that in the meantime Bear Stearns would be operating as usual. "Bear Stearns is open for business today with all the credit backing we can provide and obviously intends to remain fully active in the market up to and through the date of closure of the transaction."

JP Morgan will hold talks with credit rating agencies in the hope of securing an investment-grade rating for Bear Stearns' debt. JP Morgan has told its own investors that the buyout will ultimately add $1bn of earnings annually. Many of Bear Stearns' 14,000 staff will be out of pocket over the deal. The firm's management has encouraged an unusually high level of staff share ownership.

Ilargi: Lee Adler explains what the second new credit facility within a week (!!) means: unlimited give-aways. They have no more instruments. This is step 1 in full nationalization. Did you know most of the Fed’s primary dealers are not based in the US?

Sunday Night Massacre- Fed Finally Decides To Print Infinite Quantity of Money
The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth. In other words we are scared sheetless that come Monday there will be a massive run on Wall Street, and we are panicking, PANICKING!

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally.The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral, including all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available. What the hell's that supposed to mean? A market price? Or a price that somebody made up just because they said so?

The PDCF will remain in operation for a minimum period of six months and may be extended as conditions warrant to foster the functioning of financial markets. Forever.

The Federal Reserve Primary Dealer Credit Facility (“PDCF”) is an overnight loan facility that provides funding to primary dealers in exchange for a specified range of eligible collateral in accordance with the program terms and conditions. All terms and conditions are subject to change. Sounds like Open Market Operations but with a Pawnbroker window that will take anything for collateral.

Program Terms and Conditions

PDCF Loans
Loans will be made available to primary dealers on an overnight basis for at least six months, or longer if conditions warrant. The interest rate charged on such credit will be the same as the primary credit rate in effect at the Federal Reserve Bank of New York (“FRBNY”). Primary dealers may secure loans under the PDCF with all collateral eligible for pledge in open market operations, plus investment grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities. No non-priced collateral will be eligible for pledge under the PDCF. There you have it. The Fed for the first time will be monetizing crap, above and beyond the crap they already monetize.

Borrower Eligibility
Only primary dealers of the Federal Reserve Bank of New York are eligible to participate in the PDCF via their clearing banks. And one less now makes 19, the majority of which are not US based companies. That's comforting, isn't it.

Overnight Lending
Loans will settle on the same business day and will mature the following business day. Splitting hairs. This is a 6 month credit line.

Eligible Collateral
Collateral eligible for pledge under the PDCF includes all collateral eligible for pledge in open market operations, plus investment grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities. Collateral that is not priced by the clearing banks will not be eligible for pledge under the PDCF. In most cases the PD and the clearing bank are affiliated subsidiaries of the same parent. So I guess this is the "If they say so" pricing model.

After Bear: Waiting for the next domino
A big Bear Stearns-shaped cloud will be hanging over Wall Street this week, says the FT. As investment banks including Goldman Sachs, Lehman Brothers and Morgan Stanley kick off the Q1 reporting season, analysts expect US banks to report some $50bn in additional losses in the first half of this year – in addition to the $100bn-plus in writedowns announced so far – on the continued deterioration of key markets such as leveraged loans and real estate.

Tuesday will be crucial in determining investors’ sentiment towards the financial sector, as both Goldman and Lehman report Q1 earnings. Lehman is likely to report $500m in additional writedowns, mostly from exposure to leveraged loans, and while Goldman fared better than most rivals in the credit crunch, Deutsche Bank forecasts a $3.5bn writedown by Goldman on exposures to leveraged loans and CMBS.

Ilargi: At a time when everything is marked down, buy-outs are yet another substantial field of pain.

Wall Street braced for buy-out loans pain
Wall Street investment banks are poised for further pain from loans to private equity groups when they start reporting first-quarter results this week. Goldman Sachs and Morgan Stanley are forecast to write off at least an extra $1bn (£493m) on their portfolios of loans for leveraged buy-outs, with Lehman Brothers, another provider of buy-out financing, also expected to suffer a big writedown.

Deutsche Bank analysts expect US investment firms and commercial banks to report more than $9bn in additional losses on leveraged loans in the first half of this year. The writedowns will add to pressure from investors and auditors for other lenders to follow suit. With more than $200bn of loans committed or stuck on banks' balance sheets, the hit to profits could be substantial.

However, some big commercial banks may have an advantage over Wall Street securities houses when it comes to limiting the pain. While Wall Street firms have to mark their positions to the market price at the end of each quarter, banks can opt to hold the loans until they mature, avoiding market fluctuations. Analysts at Lehman calculate that Morgan Stanley has been the most aggressive, writing down its leveraged loan portfolio to 91 per cent of face value by last November. Barclays has taken a hit of just 2 per cent.

Some of the discrepancy can be ex-plained by banks' varying exposures to different loans, each of which has a different price. Some banks have also managed their exposure by hedging their portfolio. Nevertheless, any lender marking its portfolio to market prices is bound to suffer further. On average, leveraged loans are now valued at about 85 per cent of face value, and some trade below 80 per cent.

Ilargi: Well, almost right, but not quite. This should have read: “Sale Price Reflects the Depth of Wall Street’s Problems”.

Sale Price Reflects the Depth of Bear’s Problems
In a shocking deal reached on Sunday to save Bear Stearns, JPMorgan Chase agreed to pay a mere $2 a share to buy all of Bear — less than one-tenth the firm’s market price on Friday. As part of the watershed deal, JPMorgan and the Federal Reserve will guarantee the huge trading obligations of the troubled firm, which was driven to the brink of bankruptcy by what amounted to a run on the bank.

Reflecting Bear’s dire straits, JPMorgan agreed to pay only about $270 million in stock for the firm, which had run up big losses on investments linked to mortgages. JPMorgan is buying Bear, which has 14,000 employees, for a third the price at which the smaller firm went public in 1985. Only a year ago, Bear’s shares sold for $170. The sale price includes Bear Stearns’s soaring Madison Avenue headquarters.

The agreement ended a day in which bankers and policy makers were racing to complete the takeover agreement before financial markets in Asia opened on Monday, fearing that the financial panic could spread if the 85-year-old investment bank failed to find a buyer. Even with the frantic rescue operation, world markets were roiled as the trading day began. In Tokyo, the Nikkei index ended down 3.7 percent, while European markets were down more than 3 percent in afternoon trading.

In the United States, stock futures were down sharply before the opening on Wall Street, and investors faced another week of gut-wrenching volatility in American markets. Despite the sale of Bear, investors fear that others in the industry, like Lehman Brothers, already reeling from losses on mortgage-related investments, could face further blows.

The deal for Bear, done at the behest of the Fed and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear had weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.

A throwback to a bygone era, Bear Stearns still operated as a cigar-chomping, suspender-wearing culture where taking risks was rewarded. It was a firm that was never considered truly white-shoe, an outsider that defied its mainstream rivals.

Ilargi: Citi’s problems are very similar to all the others, only bigger. Everyone thinks Lehman will be the next to fall, but I think the risks to Merrill Lynch and Citigroup are far more interesting. This is an excellent assessment of those risks. If James Turk does his math correctly, Citi is leveraged 41.6 times. And that spells big trouble.

Could Citibank Go Under?
The London Daily Telegraph noted, following the US$200bn made available to investment banks by the Fed last Friday, in a long line of liquidity injections (or bail-outs by any other name), that "as the bail-outs are getting bigger, then clearly the problems causing them are getting bigger".

In which case size does not matter. The same problems which beset Bear Stearns are currently besetting every financial institution, including Citibank. But commercial banks enjoy certain advantages. As well as that Fed support, they have a Harry Potter-style "cloak of invisibility". While investment banks are required to mark their assets to market - the process which has forced all the write-downs - commercial banks are not. Commercial banks can make up their own minds on what a loan to a company is worth.

Commercial banks do own tradeable securities, but these can be transferred into investment portfolios if they are not performing, again making them effectively disappear until maturity. But while this cloak might have its reasons, it doesn't hide the fact commercial banks still operate with a good deal of leverage.

Turk notes Citibank's leverage, measured as total liabilities divided by stockholders' equity, has increased each quarter from December 2005 to December 2007 - from 12.3x to 18.2x. This implies equity as a percentage of liabilities has declined in this period from 8.1% to 5.5%. However Citibank, like all banks, has intangible assets and goodwill forming part of its equity. These have also increased since 2005. Intangible assets and goodwill are worthless in a crisis, so removing these from the equation increases leverage to 41.6x.

On this basis Citibank's ratio of equity to tangible assets is 2.3%. Given the cloak of invisibility, it's impossible to determine the quality of those assets, but we do know that their value need only fall 2.3% before Citi is technically insolvent, even if it is still liquid and trading.

So what are the assets potentially worth? Bear Stearns' total of  Level 3 assets (derivatives the value of which are unknown except for a best guess given they rarely trade, eg CDOs) was US$28bn. According to the US Comptroller of Currency, Citi is a counterparty to derivatives positions with a notional value of US$34 trillion. Turk is not taking this number as gospel, employing the use of the editors' "(sic)" in his missive. Let's just say Citi's total exposure is a BIG number.

JP Morgan has warned that Wall Street is facing a "systematic margin call" on subprime mortgage securities alone of US$325bn. Citibank accounts for 10% of the capital of all US banks so taking US$32.5bn off Citi's capital would leave just US$17.2bn of tangible capital. This is before we start talking about calls on all the other now distressed securities.

To reduce its leverage back to its December 2005 levels Citi would either have to raise US$46.9bn, meaning double it, or sell US$384.1bn of assets. It can't sell assets because this would knock down security valuations further and thus erode it's own capital again, so it would be self-destructive. As to raising US$47bn, how could that be achieved in this current market?

For a conclusion, Turk turns to a statement made by David Rubenstein, co-founder of the private equity firm Carlyle Group. The Bear Stearns fiasco stole the financial headlines from last week's news of the collapse of Carlyle Capital, a securities investment hedge fund managed by the Group. Carlyle Capital defaulted on its loans to Citi, among others. "This is the tip of the iceberg. People are looking at our situation and saying, 'There but for the grace of God go I'. There are others out there hanging on by their fingernails."

Citigroup CEO Tells Analysts Big Asset Sales Coming
Chief Executive Vikram Pandit has begun separating the wheat from the chaff in the New York financial giant's global empire - and there looks to be a big pile of chaff. The giant bank is preparing to shed hundreds of billions of dollars worth of assets to support a turnaround that could take a number of years.

The bank also is reviewing its leadership team and plans to make changes before its next meeting with investors in May. "We expect hundreds of billions in assets to be shed," said Credit Suisse analyst Susan Roth Katzke, who was among more than a dozen sell-side analysts who met with Pandit on Thursday night. Pandit himself didn't estimate how much Citigroup will see from selling off its non-essentials. But the new CEO "spoke generically about a sizable benefit he expects," according to UBS analyst Glenn Schorr.

"He didn't say it, but we got the impression that management thinks this, plus future earnings, adds up to enough capital relief to offset any future write- downs," Schorr wrote in a research note to clients. There are signs that Pandit's campaign has begun already. Citigroup announced last week that it will shrink its mortgage-loan holdings by $45 billion, or 20%, and combine all its mortgage operations into a single unit.

The firm also has begun reorganizing its Japanese operations and plans to sell off its stake in Japanese mutual fund company Nikko Asset Management. The firm also sold eight consumer banking branches in West Texas and closed several underperforming branches across the country. Katze also expects Citigroup to diagnose the need for a "massive amount of streamlining" and an upgrade of technology and systems infrastructure across the bank.

While large sections of Citigroup are apparently being set on the examination table, "We did not walk away with the impression that management intended to exit any major business lines in whole," Katze said. "Smith Barney will not be for sale anytime soon, if management has its say." Citigroup wrote down more than $20 billion in assets tied to mortgages last year. Analysts have warned the company may see up to another $18 billion in write-downs during the first quarter.

Big Goldman Sachs write-down could push broker stock down 10%
Goldman Sachs is viewed as the Cadillac of U.S. brokers. And, why not? Even during the last nine months of difficulty in the credit markets, its shares have done better than those of its peers. That may change this week when Goldman announces earnings. Some schools of thought believe the numbers may be especially ugly. According to the Telegraph, Goldman will announce a massive hit.

The broker's interest in the Industrial & Commercial Bank of China will be taken down due to the falling value of that institution. "Goldman will also take a hit of about $1.6bn in its leveraged loans business, which has seen a marked decline in recent months amid a dearth in demand for trading bank debt. A further $1.1bn will be written down in connection with assets owned by Goldman's principal investment area."

Over the past six months, Goldman's shares are down about 15%. The stock prices of Merrill Lynch and Morgan Stanley are off more than 40% during the same period. If Goldman's earnings show that the premier company in the industry is now being slammed by problems, what does that mean for the weaker firms in the pack. Goldman's earnings may be bad for Goldman, but they could be much worse for everyone else in the industry.

Industrial output tumbles in February
Industrial production dropped at the sharpest rate in four months during February and the nation's mines, factories and utilities ran at their slowest rate in more than two years, the Federal Reserve said on Monday. Total industrial output fell 0.5 percent in February -- much steeper than Wall Street economists' forecasts for a 0.1 percent decline -- after rising a slim 0.1 percent in January.

It was the biggest drop in monthly output since a 0.6 percent tumble last October.
The latest data on production was consistent with a sharply slowing economy that many analysts say may already be in recession. The capacity utilization rate, a gauge of how busy the nation's industries were, slowed to 80.9 percent in February from 81.5 percent in January.

It was the slackest rate of overall capacity use since 80.7 percent in November 2005 and well under economists' expectations that businesses would run at an 81.3 percent rate. The Fed said much of the unexpectedly steep fall in overall February production stemmed from a weather-related drop in utilities output, which plunged 3.7 percent after rising 2.2 percent in January.

But the manufacturing sector also weakened. Production by manufacturing businesses fell 0.2 percent after being flat in January. That left the manufacturing sector operating at its weakest rate since late 2005, at 79.3 percent of capacity compared with 79.6 percent in January. The last time the factory operating rate was lower was in October 2005 when it was at 79.2 percent.

CIBC drops further on bad news from bond insurer
Shares of Canadian Imperial Bank of Commerce slumped as much as 6% on Monday morning after one of the monoline bond insurers it has exposure to reported a hefty quarter loss. CIBC was also caught up in a wider market downturn as the banking sector pulled the Toronto Stock Exchange down due to more signs of trouble in U.S. financial markets. CIBC was down $2.09, or 3.5%, at $57.81 in the morning, easing from earlier lows.

U.S. bond insurer FGIC Corp, the parent company of Financial Guaranty Insurance Co, posted net losses of US$1.89-billion for the fourth quarter due to write-downs of collateralized debt obligations.
CIBC, which has been hard hit by its exposure to U.S. subprime mortgage-related securities, has US$566-million in notional subprime exposure to FGIC, said Brad Smith, analyst at Blackmont Capital, in a research note.

"These losses and the FGIC's potential reorganization is more negative news for CIBC," wrote Mr. Smith. "We note that FGIC was a major player in the collateralized loan obligation (CLO) market, leading us to believe FGIC could be a sizeable counterparty to CIBC's $22 billion in nonsubprime monoline hedges, the majority of which are CLOs."

CIBC reported pretax charges of $3.38-billion on securities related to the subprime market and credit protection in the last quarter and executives acknowledged more write-downs may be needed.

Bank-to-bank lending freezes; bankers ask "who's next?"
Financial trading and interbank lending almost ground to a halt on Monday as banks grew fearful of dealing with each other following Friday's near collapse of U.S. investment firm Bear Stearns, prompting talk of another round of coordinated central bank aid. As banking stock prices and the U.S. dollar plummeted, banks' access to unsecured borrowing from other banks fell to a relative trickle and dealers said the over-the-counter market had become highly discriminatory, depending on the bank name.

Published dealing rates were unreliable and analysts said any bank that had not already secured funding further than a week or so would struggle to raise cash at all. "Bear's near-collapse and takeover accelerates the liquidity crunch and the money market crisis," Dresdner Kleinwort analyst Willem Sels told clients in a note. "Banks' risk aversion and sensitivity to counterparty risk should rise even further, leading to more pressure on hedge funds. Money markets are having a brutal wake-up call."

Bankers said they were struggling to assess developments since the New York Federal Reserve said on Friday it was propping up the stricken firm via Wall St bank JP Morgan, and intense concerns about the stability and solvency of financial counterparties had dealing volumes in lending markets seize up. But with concerns about whether other firms may meet a similar fate to Bear Stearns, nerves on every trade were jangled.

"It's quite illiquid this morning. If you want unsecured cash you're really going to have to pay up for it. It's really quite an intense situation," said Calyon analyst David Keeble. Banks led the losers as stock markets lost more than 3 percent. UBS, Royal Bank of Scotland and Barclays all fell more than 8 percent. HBOS and Alliance & Leicester slid more than 11 percent. Shares in Lehman Brothers dropped 34 percent before the opening bell on Wall Street.

Bear execs lack golden parachutes as stock plan crunched
Bear stock soared to a record high of $172.61 in January last year as Wall Street's mortgage and buyout booms peaked, but those shares have plunged as the bank played a leading role in fueling a subprime mortgage crisis that continues to inflict damage on financial markets.

Bear Stearns' shares, which sank to $30.85 Friday on worries the bank was quickly running out of cash and needed a Federal Reserve bailout, now fetch just $2 each under JPMorgan's bailout late on Sunday. The plunging shares, plus a lack of the normal payout expected when a company is taken over, known as 'golden parachutes', delivers a serious blow to the bankers, traders and other executives worldwide at a firm that has long encouraged its above-average levels of inside ownership.

"The current stock ownership by executive officers reflects a significant personal investment in the company by those who are most responsible for the company's future success," the bank said in a proxy statement.
Employees own around 30 percent of the bank. Yet loyalty to the firm has cost employees as Bear's fortunes turned south.

According to Bear's recent proxy statement, the executive committee members at the fifth-largest U.S. investment bank owned about 9 percent of the firm's outstanding stock at the end of January. Based on shares outstanding in January, shares held by the top handful of executive officers plunged in value from about $1.8 billion 14 months ago to just $22 million today.

UBS Is Said to Consider 8,000 Layoffs
The Swiss bank UBS is considering cutting as many as 8,000 jobs to save costs, and will not rule out a possible split of its wealth management and investment banking business, a Swiss newspaper reported Sunday.

The chief executive, Marcel Rohner, reaffirmed at a recent meeting of 300 senior UBS bankers that the company wants to keep its wealth management and investment banking operations under one roof, but he also said alternative plans always have to be considered, the Swiss weekly SonntagsZeitung reported.

Among banks worldwide, UBS is one of the worst hit by the financial markets crisis that started with the demise of the market for risky home loans in the United States. The bank has written down more than $18 billion on such assets last year, and analysts expect more to come.

The write-down caused a loss at UBS’s investment bank, which more than offset strong income from the business of managing the assets of rich clients, resulting in the bank’s first-ever full-year net loss. Mr. Rohner also told bankers attending the meeting, held in Berlin, that UBS was holding around 30 billion Swiss francs ($29.2 billion) worth of municipal bonds. These are highly rated assets, but the market for them has almost dried up in recent weeks.

U.S. Stock-Index Futures Slump; Bear Stearns, Lehman Retreat
U.S. stock-index futures tumbled after JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for less than a 10th of the bank's value and the Federal Reserve lowered its discount rate in an emergency meeting.
Bear Stearns, Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. plunged. UBS AG downgraded U.S. financial shares on concern liquidity problems may worsen. Bear Stearns, Wall Street's fifth-largest securities firm, lost its independence after 85 years following a run on the company.

Shares dropped in Europe and Asia after the Fed, in its first weekend move in almost three decades, reduced the rate on direct loans to banks. "We are seeing a crisis of confidence in the market," said Nick Skiming, who helps oversee about $2 billion as fund manager at Ashburton Ltd. in Jersey, Channel Islands. "There is a lot of concern about the Bear Stearns deal. Although JPMorgan has now come in and bought the bank for what is a snippet of the actual price, it does suggest that the worries will continue and deepen."

Bear Stearns plunged $26.15 to $3.85 after JPMorgan agreed to buy the bank for $240 million, or $2 a share. The Fed is providing financial backing to JPMorgan for the deal. JPMorgan gained 36 cents to $36.90. The "fire sale will cause valuation readjustment for all financials," Oppenheimer & Co. analyst Meredith Whitney wrote in a note to investors today. "Banks have the greatest downside risk." Lehman, the fourth-largest U.S. securities firm, sank $12.64 to $26.62.

Goldman Sachs dropped $12.69 to $144.17. The Sunday Telegraph said the brokerage will announce asset writedowns of about $3 billion this week, without citing anyone. The investment bank may report a decline in first-quarter earnings of about 50 percent, the newspaper said. UBS downgraded shares of Goldman and Lehman to "neutral" from "buy," saying the liquidity squeeze will get worse before it gets better.

"Valuation will likely test 20-year lows rather than 10- year lows," analysts including Glenn Schorr and Mike Carrier wrote in a report today. Goldman, Morgan Stanley and Lehman may post further write- offs when they report first-quarter results this week, the Financial Times reported. U.S. investment firms and commercial banks are expected to announce more than $9 billion in additional losses in the first half, the newspaper said, citing Deutsche Bank AG analysts.

"If Bear Stearns was worth a hundred bucks three weeks ago, and is now worth two, what does that say about the health of the financial system, about Barclays, Citigroup?" said Tom Hougaard, chief market strategist at City Index Ltd. in London. "It's a domino effect. I wonder which the next one is to keel over and perhaps bring someone else down?"

Moody's cuts Lehman, Jefferies outlook to stable
Moody's Investors Service on Monday cut the rating outlook on U.S. investment banks Lehman Brothers and Jefferies Group to stable from positive, meaning the ratings are not expected to rise. Moody's affirmed Lehman's rating at A1 and Jefferies' at Baa1, but said both banks faced challenges.

"Recent events impacting numerous financial institutions and culminating with Bear Stearns liquidity problems highlight the high (and arguably unprecedented) degree of financial-system stress that has emerged over the past eight months," Moody's said in a statement.

As a result, upgrades are no longer likely for the two firms. Moody's said both Lehman and Jefferies had robust liquidity positions

Credit Crunch Is That Bad, And It May Get Worse
Crazy world. Asian and European stock markets tanked today, and premarket U.S. stock futures followed; the dollar briefly fell bellow 96 yen and closed in on $1.60 a euro; crude oil neared $112 a barrel; and gold at one point was fetching $1,030 an ounce -- all in the wake of yesterday's $2-a-share agreement to sell venerable Bear Stearns to J.P. Morgan Chase at the government's urging, and a double-barreled shot by the Federal Reserve to keep money flowing through the U.S. financial system.

Oh, and then Southeast Asia's biggest bank today may be partially cutting off Lehman Brothers Holdings.

DBS Group Holdings sent an internal email to some of its traders "saying it would not deal with Lehman Brothers from now on. It said DBS shouldn't enter into new dealings with Lehman or Bear Stearns," a person familiar with the situation tells Dow Jones Newswires. Another person tells Dow Jones the email said nothing about closing the bank's existing positions with Lehman, and a Lehman spokesman in Asia tells the news service that "our liquidity position is and continues to be strong."

Lehman later said that DBS has placed trades with it today, and Moody's Investors Service issued a statement saying it affirmed its A-one rating on Lehman's senior long-term debt. There was no further explanation of why DBS may have lost faith in Lehman, or other signs that Lehman has suffered the kind of confidence crisis among its trading partners that so swiftly sank fellow Wall Street titan Bear Stearns last week. But the news hits the financial world at a time of what feels like historic anxiety, and when the biggest factor directing the flow of money around the world may be psychology.

U.K. Stocks Tumble to Lowest in Two Years, Led by RBS, Barclays
U.K. stocks slumped to their lowest in two years after an emergency rate cut in the U.S. and JPMorgan Chase & Co.'s agreement to buy Bear Stearns Cos. for $2 a share signaled turmoil in financial markets is deepening. Royal Bank of Scotland Group Plc led banks lower. Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, declined after saying profit tumbled 68 percent as a housing slowdown in the U.S. spread to the U.K. and mainland Europe.

British Energy Group Plc, the U.K.'s biggest electricity producer, surged after saying it is in talks that could lead to an offer as utilities seek access to the company's nuclear stations and sites for new atomic plants. "There is a real crisis of confidence," Toby Nangle, a member of the strategic policy group at Baring Asset Management in London, which manages $55 billion, said in a Bloomberg Television interview. Mention of Bear Stearns and Northern Rock Plc in the same sentence is appropriate because "in both instances the equity holdings were wiped out," he added.

The benchmark FTSE 100 Index fell 137.7, or 2.5 percent, to 5,494.6 the lowest since Dec. 2005, at 10:54 a.m. in London. The FTSE All-Share Index lost 2.5 percent and Ireland's ISEQ Index declined 4.8 percent. Royal Bank of Scotland, the U.K.'s third-biggest bank, dropped 7.9 percent to 307.5 pence. Barclays slumped 6.5 percent to 404.75. HBOS Plc tumbled 9.3 percent to 478.75 pence, the biggest drop since Sept. 2001.

Ilargi: The pound loses against the US dollar. That’s an achievement all by itself.

BOE Offers Banks Emergency Cash to Ease Money Markets
The Bank of England offered extra cash to banks, the first short-term emergency operation in six months, to alleviate tensions in money markets. "This action is being taken in response to conditions in the short-term money markets this morning," the bank said in a statement today in London. "The bank will take actions to ensure that the overnight rate is close to bank rate. Along with other central banks, the Bank of England is closely monitoring market conditions."

The U.K. central bank's move follows the U.S. Federal Reserve's reduction of the discount rate yesterday, the first weekend action of its kind in more than three decades. The Fed's rescue of Bear Stearns Cos., Wall Street's fifth-largest securities firm, sent the dollar to record lows against the euro and Swiss franc and world equity markets tumbling.

"Clearly we're very much still in the throes of this process," said Richard McGuire, an economist at Royal Bank of Canada in London. "The risks to the downside are mounting. While the rest of the world is clearly implicated it's still primarily a U.S. problem. The U.K. is under threat." The bank offered 5 billion pounds ($10 billion) of three- day reserves in an "exceptional" fine-tuning operation. It received bids totaling 23.6 billion pounds and awarded 21.19 percent of them, the bank said in a statement.

"As you would expect, the Tripartite authority, that is the Bank of England, the Treasury and the Financial Services Authority, have been in close contact with their U.S. counterparts over the weekend and continue to closely monitor the markets," Michael Ellam, a spokesman for Prime Minister Gordon Brown, told journalists in London today.

The pound fell as much as 0.3 percent against the dollar after bank announced the operation today. It traded at $2.0024 as of 11:27 a.m. in London. The dollar weakened to as low as 95.76 yen today, a level not seen since August 1995, from 99.09 on March 14. It dropped to a record low of $1.5903 per euro and an all-time low of 0.9658 Swiss francs.

UK banks scramble for Bank of England funds
The Bank of England's emergency offer of 5 billion pounds of 3-day loans was nearly five times oversubscribed on Monday as financial institutions scrambled for cash in the face of a global credit crunch. Aimed at restoring confidence to panicky markets in the wake of the weekend fire sale of U.S. investment bank Bear Stearns, the loan offer was only the second such "exceptional" operation since the crisis began last summer.

Investors were scared things might only get worse and sold the pound aggressively. Its trade-weighted index was on track to record its weakest close since March 1997 even before the current government came into power. The Bank said it wanted to bring overnight interest rates down. Banks were so fearful earlier of each others' solvency on Monday they were charging each more than 25 basis points above the main Bank lending rate for loans of even just one day.

"Given the money market conditions this morning, the situation is very serious and represents a new and unwanted twist to the credit squeeze," said Philip Shaw, chief economist at Investec. "Five billion pounds represents a substantial sum."
The last time the central bank took such a step was in September just after the run on Northern Rock bank, Britain's fifth-biggest mortgage lender, which was subsequently nationalised.

Pound Slumps to Record Versus Euro After Fed Cuts Discount Rate
The pound fell the most in six years against the euro, declining to a record, after the Federal Reserve cut its discount rate and JPMorgan Chase & Co. bought Bear Stearns Cos. Gilts soared. The pound also slipped to a three-year low against the yen and the lowest level in 12 years versus the Swiss franc as European stocks slumped, prompting investors to pare holdings of higher-yielding currencies.

The Fed cut the rate on direct loans to banks by a quarter-point to 3.25 percent to shore up dwindling confidence, its first weekend emergency action since 1979. "Sterling is coming under a lot of pressure, triggered by the U.S. side of the story, with what's happened with Bear Stearns and the Fed action," said Ian Stannard, a currency strategist in London at BNP Paribas SA, France's biggest bank. "Equity markets are down and all the yen crosses are under pressure today, all the high-yielders. Pound-yen was still very much a carry-trade currency."

The pound dropped to 79.12 pence per euro, the lowest level since the common currency's 1999 inception, and was at 78.29 pence by 9:20 a.m. in London, from 77.58 pence at the end of last week. The decline in stocks around the world encouraged investors to sell higher-yielding currencies, such as the pound, that they'd bought using low interest-rate loans in yen and Swiss francs.

These so-called carry trade investors borrow cheaply and invest the proceeds into higher-yielding currencies, earning the spread between the two interest rates. The trades are considered risky because currency-market fluctuations can wipe out profit. The Bank of England said today Europe's second-biggest economy was facing "difficult conditions" that may slow growth. "This could act as a drag on economic activity and in turn prompt further deterioration in the quality of banks' assets and limit their ability and willingness to lend," the U.K. central bank said in its quarterly bulletin released today in London.

Gulf central banks urged to sever links with tumbling US dollar
Pressure is mounting on central banks in the Gulf to fight surging inflation when they meet on Wednesday by severing the link between their currencies and the tumbling US dollar.

Officials in Qatar and the United Arab Emirates have denied rumours of an imminent decoupling, but investors are betting on reform and are rushing to buy local currencies as investment banks issue fresh calls for revaluation. Analysts said that, despite the momentum, the Gulf states were unlikely to decouple suddenly from the dollar. They predicted more measured moves towards links to a basket of currencies.

“The feeling is [that] unilateral moves would only cause more confusion and difficulties for those countries who try to maintain the peg,” Jason Goff, head of group treasury and market sales at Emirates Bank, said. Mr Goff said that the Gulf states were more likely to move towards establishing a monetary union before they dropped the dollar. “I'm not holding my breath for a de-peg any time soon,” he said.

However, in a region where inflation has sent everything from the cost of food to construction supplies soaring, frustration is growing. In Qatar, inflation reached 12 per cent last year, the highest in the region, according to the International Monetary Fund. The UAE's inflation was 8 per cent. Some estimate that off-book inflation is as high as 40 per cent for some goods.

With central banks unable to lower interest rates to tackle inflation, the Gulf states are trying other measures. Qatar has frozen rents for two years and the UAE has announced price controls on basic foods and said that it would cancel customs levies on cement and steel imports. Yet there is a consensus emerging that something more drastic needs to be done to achieve lower inflationary targets, such as the 5 per cent goal that the UAE announced last week.

“A revaluation is certainly required to ease inflationary pressures,” Zahed Chowdhury, head of Middle East research in Dubai for Deutsche Bank, said. The bank predicts that Qatar and the UAE will ditch their dollar pegs this year and track currency baskets, as Kuwait did last May. “The currency peg with the dollar worked well while both economies were moving in the same direction. Now, these two economic blocks are moving in completely opposite directions and it no longer makes sense,” Mr Chowdhury said.

Japan Stocks Fall to 2-Year Low on Bear Stearns Sale
Japan's stocks plunged to the lowest in more than two years after JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $2 a share and the U.S. Federal Reserve cut lending rates to banks at an emergency meeting.

Nomura Holdings Inc., Japan's largest brokerage, headed for the lowest close in two months. Mazda Motor Co. led exporters lower after the yen rose to the highest against the dollar since 1995. Hitachi Ltd., Japan's biggest maker of electronics, fell the most in six years after reversing its profit forecast.

``The $2 price for Bear Stearns tells everything about how bad the operating situation is for brokerages,'' said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo, which manages the equivalent of $5.7 billion. "Investors worry other securities companies are in a similar situation."

The Nikkei 225 Stock Average sank for a third day, losing 514.61, or 4.2 percent, to 11,726.99 as of the 11 a.m. trading break, the lowest since July 22, 2005. The broader Topix index dropped 50.45, or 4.2 percent, to 1,142.78. All 33 industry groups on the benchmark dropped.

Ilargi: Let's not focus only on the big banks; the credit crunch happens right where you are, too.

California lays off 20,000 teachers
The number of teachers in California who have been issued notices of potential layoffs has hit 20,000, the state’s education chief said Friday. School districts are required by law to notify teachers and other certificated staff members that they could be laid off by March 15. The recent layoffs – including dozens in Placer County districts – have been spurred by $4.8 billion in cuts to education contained in Gov. Arnold Schwarzenegger’s January proposed state budget.

In a statement, State Superintendent of Public Instruction Jack O’Connell blamed the layoff notices on a “priorities problem” and decried the governor’s proposed budget for putting student performance “in grave jeopardy.” “The governor’s budget fails to invest in our future,” O’Connell said in the statement. “We should be encouraging the best and brightest to join the teaching ranks. We know that effective teachers are the number one element in student success. Sadly, the flood of pink slips being handed out only discourages people from entering the teacher profession.”

In recent weeks, local school boards have approved reductions in force for the Eureka, Dry Creek, and Lincoln school districts, as they seek to close massive budget holes. The Eureka Union School District issued intent to layoff notices for about 12 full-time positions, officials said. Dry Creek Joint Elementary School District trustees recently approved about 35 full-time positions. And Lincoln Unified School District did the same for 20.7 full-time positions.

“Districts are really in a hard place right now, having to decide whether or not with the proposed budget they’re going to make deep cuts – in essence, layoff notices – or they’re not going to make those cuts and risk falling under county or state oversight,” said Placer County Superintendent Gayle Garbolino-Mojica. “It’s a board decision on which of these parade of horribles is the lesser of two evils.”

ABCP investors face new hurdle
Court approval of bankruptcy application would lead to further delays

Investors holding $33-billion of stranded asset-backed commercial paper (ABCP) are faced with further delays and reduced investment recoveries as the largest restructuring operation in Canadian history shifts to the courts. A committee of investors that has been seeking since August to revive the troubled short-term notes will ask a Superior Court of Ontario judge as early as today to take control of the rescue and grant the notes protection under the Companies' Creditors Arrangement Act.

If the court application is successful, assets such as mortgages and car leases linked to ABCP will be protected from default notices, lawsuits and other potential claims until a restructuring is approved by the courts. Technically there is no provision under CCAA for the courts to grant bankruptcy protection to the 20 trusts that issued the notes.

But people familiar with the plan of arrangement that is set to be filed in court said that it calls for the ABCP trusts to be converted into corporations, which are eligible for bankruptcy protection. "The money and scale of the problem here is so large that the judge will bend over backwards to accommodate the committee," said one person who is familiar with the plan. It is understood that Mr. Justice Colin Campbell has agreed to preside over the case.

The planned court filing is a devastating setback for investors and the committee of high-powered investors led by Toronto lawyer Purdy Crawford who had sought a consensual solution to a crisis triggered by the meltdown in subprime mortgages.
The so-called Crawford committee had hoped to unveil last week detailed terms of a workout that was designed to convert the short-term notes into long-term bonds that the committee predicted would ultimately repay virtually all principle owed to investors.

The centrepiece of the plan was a $14-billion line of liquidity that was to be funded by a group of Canadian and international banks. Sources close to the committee said the complex plan started to go off the rails in late February when deteriorating global credit conditions triggered a fresh round of fears that banks would be hit with more losses and have less money to lend. Although the committee had assurances from Canada's Big Six banks that they would contribute $2-billion to the $14-billion liquidity line, sources said one Canadian bank kept delaying its formal approval.

The committee ran out of time to wait for the tardy bank Friday night when a standstill agreement with investors expired. With nothing stopping investors from declaring defaults on their troubled ABCP, the committee had no choice but to seek court protection this week. "It was a Kafkaesque experience," said one person familiar with the discussions.

People close to the Crawford committee have privately advised some major ABCP investors that they now only expect to repay an average of 80 cents on the dollar for the frozen ABCP under a plan of arrangement that is expected to be filed in court. "They have been telling us to be patient and now the scenario is not nearly as good as it was even three weeks ago," said one adviser to a group of investors who declined to be identified.

In December, the Crawford committee had promised investors the restructuring would be completed by the end of April. It is doubtful the deadline can be reached now that the issue is being moved to the courts.

Some legal experts predicted the restructuring could become entangled in court battles for months as various investors jockey to assert their rights. Some investors own notes backed by assets more financially sound than assets backing other series of ABCP notes. Holders of these stronger notes may seek to claim the underlying assets separately, rather than participate in a group restructuring.

Canada ABCP body says market repair not in trouble
The committee charged with restructuring a troubled corner of the Canadian market for asset-backed commercial paper had always planned to involve the courts to help it complete its complicated deal, a spokesman said on Monday. Dismissing a newspaper report that said the involvement of Canadian courts showed the repair process for some C$33 billion ($33 billion) in nonbank ABCP is in trouble, spokesman David Weiner there was nothing alarming in the court discussions, now due on Monday afternoon.

"It was always going to court. It is not because of any sudden perceived insolvency," Weiner said.
The Globe and Mail newspaper said on Monday the committee's planned application on Monday for bankruptcy protection for 20 commercial paper trusts that issued notes to investors is a "devastating setback" for the committee and investors who have been working for months to agree on how to fix this segment of the money market.

The sector seized up last August when investors fled their holdings on concerns that the trusts were invested in toxic U.S. subprime mortgages. Investors include some of Canada's biggest pension funds as well as small mining companies and individual investors. Their funds have been frozen under standstill agreements while the committee tries to devise a plan to get the market working again.

The committee, led by veteran Bay Street lawyer Purdy Crawford, said late on Friday it expects to file an application in the Ontario Superior Court of Justice on Monday under the Companies' Creditors Arrangement Act. It is asking the court to call a meeting of ABCP noteholders to vote on a repair plan hammered out over many months in an attempt to help investors get their money back.

"We view this announcement as positive for ABCP holders, since it reduces the near-term risk of a disorderly liquidation, in our view," RBC Capital Markets analyst Andre-Phillipe Hardy said in a note to clients.
Weiner said the committee is expected to appear before Judge Colin Campbell in the Ontario Superior Court of Justice on Monday afternoon. "The reason for the referral to the court is that it settles everything in a concurrent manner as opposed to trickling along in a sequential manner, which would take forever," he said.

"It gives everybody a uniform and equal say in the proceedings so that individual noteholders would get a vote. It resolves all outstanding legal claims. Everything gets settled at one point when the court takes possession of the file." The reason for the application is because a standstill agreement, which prevented banks from making margin calls, expired on Friday, Weiner said.

A number of smaller investors have already filed lawsuits against brokers who encouraged them to invest in nonbank ABCP because of the attractive interest rates they offered.


. said...

Yes, tinyurl, but I swear its got Cramer inside it, and he is doubleplus stupid ...

Bigelow said...

"Did you know most of the Fed’s primary dealers are not based in the US?"

So who owns the Fed these days?

Anonymous said...

I'd add this article (from friday in french and today in english) to the list:!-Global-systemic-crisis-End-of-2008-Pension-funds-go-off-the-rails_a1428.html?PHPSESSID=176ee8371baac068772e03301f8c1133


Anonymous said...

NY Fed list of primary dealers as of November 30, 2007:

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

Ilargi said...


I sent that list around recently. Today, one name on it is an odd one out, isn't it?

Note that the newly-fangled (over the weekend) Fed credit facility was set up with the specific purpose to give the investment banks direct Fed discount window access. A second Bear is the last they want. Bear had the direct access, but not at below-inflation rate.

Jeez, what a mess.

Anonymous said...

We're at a pivotal moment in history. Your short notes before articles are a great help in helping me approach the reading and understand the little that I do what is happening--I also like all the links to articles.

As far as the list of primary dealers is concerned: Is it possible to find out who are the major equity holders in these institutions? I suppose we'll never know for sure. (I read with great interest the Griffin interview and considered purchasing the Creature of Jekyll Island--but decided against it. I'm not sure it will help me prepare for the future, except piss me off more than I already am.)

Anonymous said...

Hi Ilargi, I see quotes like

"the Fed is a tiny player in the mortgage market. The $200 billion of mortgages Bernanke will be taking on are a drop in the ocean that is the $11 trillion mortgage market. And he has only another $400 billion in Treasurynotes to play with - if he is willing to have these mortgages make up his entire stock of assets."

Can the Fed itself go bankrupt?


Anonymous said...

Would it have made a difference to Bear if last week it had direct access to the Fed discount window?

Ilargi said...


The Creature from Jekyll Island is one of the best stories ever in modern literature. Read it.


"who owns the Fed these days?"

See: "The Creature from Jekyll Island"


Can the Fed itself go bankrupt?

No it can't, its losses are passed on to the US taxpayer, even while, ironically, its profits are not.

ric again:

"Would it have made a difference to Bear if last week it had direct access to the Fed discount window?"

It would have prolonged the suffering, in the same fashion that it does today for the commercial banks. Do read the Citi article I posted: "Could Citibank Go Under? " A 41.6 % leverage is a death sentence.

Note that last night's new Fed window was designed specifically for easier access for the investments banks. They learned from Bear, where they had to go to go through JPMorgan. They like JPM a lot, but the time factor was crucial: direct loans are needed.

The Fed has been doing direct deals with Bear for 80+ years, but there was never a need for the "discount window". Now there is, and it has been provided, albeit too late to save Bear.

And it'll prove useless for all the others, too: emergency cash is useful only if you have prospects of earning the amount borrowed, not if all you can do is to pay off your gambling debts with it.

Anonymous said...

I'm not sure if it's a strange convention in economic reporting (wouldn't be the first one to deliberately lie with numbers), or just my own lack of knowledge but a 41.6:1 leverage ratio (41.6 dollars out for every 1 actual dollar?) puts Citi at 97.7% leverage, 80:1 puts them 98.8%.

A typical bank, in my head, was "supposed" to be 90-95% leveraged (9:1 - 19:1).

It is probably oversimplistic, but I read a 40:1 leverage ratio as meaning that if everyone called in all ther debts all at once, the bank could only pay back 1/41 of the total. Is this the case?

Anonymous said...

I would be pleased to have "The Automatic Earth" poem back on the site.

vocn said...

Hi, I've been reading about the fall in oil prices...
How come these days that we cheer WTI prices of 106 U$/bbl??
This situation only two years ago was plain unthinkable.
This unraveling situation keeps changing standards, maybe forever??

I would expect WTI to go to about 90 U$/bbl if a really big recession declares itself in the US. But before we reach there, all bogus money must be first written off.

Anonymous said...

Ilargi, it seems that munis are not faring so bad, the spread they are getting compared to Treasuries is not too wide, according to this Bloomberg news.

Anonymous said...

It looks to me like the market is saying that National City may be the next one to fall -- 43% drop on the day. Even though the "VISA" IPO is (if it happens) supposed to make them "WELL"

Anonymous said...

+Hi ilargi,

If you don't have it on for today already you might want to post this one:
The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Anonymous said...


thanks for the link-just when the talking heads on NPR make me think this blog may be "too extreme", (ha, ha), an article like that sobers me right up-at least till I can start drinking again.....