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CITI Starting to Look Like Ford and GM

CITI is undercapitalized.  Read this article and take note of how many concepts we have discussed that are in the article.  Too manyacquisitions, not generating income, increasing dividends, and all while the stock market was going up. In sort values were increasing and CITI was buying as prices went up, never a good strategy. And it gets worse. Why?

Because when one accumulates second tier investments, once the bubble pops there is no market for tem.  and so one has to sell the family jewels so to speak to try and keep the surviving entity alive.  Ford is now selling finally profitable Aston Martin and then Jaguar, GM had to sell half of crown jewel GMAC, ouch sell GMAC and keep Buick, I think I will pass on that one. And now CITI is in the same shape.  CITI will not find a market for its shakey investments and will no doubt emerge a smaller entity when things are said and done. Also note thew new alphabet soup of SIVs, CDOs, tranches, do you know what those mean?

Speaking of getting worse, off balance sheet derivative exposure may make things much worse than Paulson or Bernake ever imagined.  Both have touted supposedly sophisticated risk avoidance schemes involving derivatives.  It used to be that folks bought gold and silver as hedges, at least one had the gold. What does one have with ‘collateralized tranches of sub prime debt?"  No wonder gold is up.

Read these as we will be discussing them in class.

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4 responses to “CITI Starting to Look Like Ford and GM”

  1. Jerry Avatar
    Jerry

    Dr. Elam,
    So let me get this straight. A bank will create an SIV Structured investment vehicle for the sole purpose of borrowing money at lower rates because it’s not regualted etc.It then gives these loan proceeds to the bank for it to lend out at a higher FED rate. The profit being in the difference of the two interest rates. Why would the Fed think that discounting the fed rate would cure the SIV problem? It only kills that profit motive.
    How are SIV’s any different than legal SPE’s not Enron’s SPE’s.
    Jerry

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  2. Jerry Avatar
    Jerry

    Collateralized debt obligations….hmmm Im still not seeing it.
    So these are entities set up to sell securities that, in this case are backed by sub prime mortgages who are in turn backed by the original entity like Merrill?
    Clearly I need help on this one.
    Jerry

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  3. Dennis Elam Avatar
    Dennis Elam

    Jerry
    Good questions all and worthy of a longer post which I will do as soon as I get thru the latest business week which I suspect will have some good links in it.
    You will recall from our study of intermediate accounting specifically accounts receivable, that firms can securitize or sell their receivables by factoring, borrowing, or outright turning them into securities which are sold to the public. A CDO is such an animal. Collateralized debt obligation means that the collateral for the security is the debt that is owed by individuals, usually originally on a credit card.
    The creation of SIVs which I understand was suggested by Tsy Secy Paulson is probably more short term liquidity and window dressing to assure the public that SOMETHING indeed is being done. Paulson had to recant the idea that the SIVs were going to buy ‘bad’ paper but if they are not going to soak up the bad stuff, what is the point? There is already a market for the good stuff.

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  4. Mannie Avatar
    Mannie

    well its official, CEO Charles Prince resigns.

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