Thursday, November 20, 2008

Citi-advised SIVs --- It seems like a decade ago

Remember back in the day when Citi had a little problem with off balance sheet assets. Remember theMaster-Liquidity Enhancement Conduit, or MLEC?  And the Citi SIV?  It is now mostly over, with the remaining assets ($17 billion) folded into their balance sheet.  $17 billion isn't much, but in the 15 months that this has been in the process of liquidation, the stock went from a market cap of $200 billion to $25 billion.  Their announcement states: 
In order to complete the wind-down of the Citi-advised Structured Investment Vehicles ("SIVs"), Citi announced today that, in a nearly cashless transaction, it has committed to acquire the remaining assets of the SIVs at their current fair value, estimated to be approximately $17.4 billion, net of cash.

Lessons learned? Stupidity trumped greed. It wasn't the SIV, it was everything else. And finally, they really made virtually nothing on this, prior to the blowup. Maybe that's the definition of greed -- risking everything for nothing. From Barrons
SIVS earn narrow spreads estimated at 0.30 to 0.40 percentage point. This means that Citigroup, which had $100 billion of SIV assets this summer, might have netted $300 million annually, perhaps split 50/50 between Citigroup and the outside equity holders. The equity investors were getting a relatively modest 8% annual return.

Citi's factsheet on the SIV's was relatively upbeat.  As December, the SIVs had $62 billion in liabilities, less $13 billion in cash and $2.5 billion in junior notes (which take the first hit) for a net exposure of $57 billion.  I looked through the earnings announcements, and didn't notice that there were significant losses related to these assets.  Very difficult to tell without heavy digging.  I'm sure the $2.5 billion was wiped out (SIV junior notes) and they did mention a few hundred million.  Under a billion unless it was hidden somewhere else.

The assets had a maturity of 3.5 years, so I would think the remaining ones would have a lower duration.  And there may be another haircut or two on the $17 billion.  They obviously can't sell them easily, so they may have to just hold them and see what happens.

In conclusion, they didn't make much on these things.  They may not have lost more then a billion or so on them.  They might get most of the remaining $17 billion back.  In the meanwhile, they managed to lose money on virtually every other part of their balance sheet.  The remaining assets are all in areas that look sensitive to the economy.  

If we assume that the SIV WASN'T THAT BAD, (note that I could easily have missed billions in writedowns - but lets just say it's true), then it is possible for the company to be correct -- it isn't that bad, and the critics wrong about the SIV.  But being right about the SIV (assuming it is true) doesn't mean that they (and you if you believed them) were right about the company.  It was other stuff.  Huge numbers of things.  Other structured finance securities, marks for the failed monolines, general loan losses, etc. etc. 

Follow Up:
Here is where we are now:  City tries to put itself up for sale.

The had a market cap of $200 billion.  The raised $50 billion in private capital.  They got $25 billion from TARP.  

Result, market cap, $25 billion.  

And it still isn't clear how much (if anything) they lost on the stupid SIV.  I remember that every time Citi said ANYTHING about the SIV, their stock dropped by 10%.  I have a possibly demented idea that if they had just moved it to their Balance Sheet in August, 2007, they might have kept under the radar screen, become the 3rd or 4th worst money center bank, and maybe even thrived.  Probably not, but the SIV -- the way they handled it -- killed them as a serious business.  Please let me know if I am missing something regarding SIV specific losses.



ps said...

TARP bought an equity stake of what % for $25B? So TARP's Citi investment is now worth that % of $25B. Paulson's decision to use TARP to buy equity rather than assets gave him some extra leverage - too bad for us taxpayers that funded it. It will be interesting to see how his (our) other TARP investmens are doing.

BTW, is Henry any relation to the Pat Paulson that ran for president a long time ago?

cap vandal said...

TARP bought preferred stock and got some warrants. It pays 5%. The TARP idea was to stabilize the banks and get some private equity investments AFTER the TARP injection.

It worked for some firms -- Wells Fargo for example.

I suppose they could have gotten 79% of the equity, but why bother. They were trying to stabilize the banks, so tough love would have just made it tougher. Also, the FDIC is on the hook, so the logic of just giving out money on easy terms, wasn't a bad idea, except to the extent that any bailout that doesn't work is a bad idea. Really bad idea.

ps said...

My initial reaction to equity injection in lieu of buying assets was that it was a simpler, quicker way to improve capitalization. It seemed easier to value equity being traded than those assets. I don't know how to view the valuation of the preferred. The thought behind my original post was there was more downside to the equity positions than there was to the asset values. The preferred should be less volatile than the common but hard to say how it stacks up against having bought assets.