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Killing it like a hooker in Hong Kong

The world’s biggest carry trade…

It’s occurred to me that the US and the Fed are now officially engaged in the world’s biggest carry trade. They’re borrowing money at the risk free rate and pumping it to the economy, whether it’s through the TARP or the Fannie or Freddie.

Here’s a thought, you don’t think Citi, or Goldman or BofA are good enough credits to lend them money at say 5% interest, so instead you lend money to the US government at 2%, and the government then onlends this to the banks at 5%. Ludicrous. All that money has to come from somewhere, so first you borrow it, and then you print paper money till the real value of those debts that you incurred is impaired.

Sooner or later the rest of the world is going to wise up to this. TANSTAAFL

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January 16, 2009 Posted by | Uncategorized | , | Leave a comment

If Vikram Pandit was honest….

I was thinking of what Vikram Pandit might have said when he took over leadership of Citigroup. If he had been really honest, he might have said the following:

Date: Dec 11, 2007

Transcript of speech by Vikram Pandit

Thank you Win Bischoff and Robert Rubin.

Dear Colleagues,

Citi has been through a trying time in the last 12 months and indeed in the last few years. While I am a relative newcomer to Citi, I am extremely proud of this institution’s history and aware of the tremendous responsibility that comes with assuming the mantle of leadership.

First, it is necessary for me as incoming CEO to make a thorough assessment of the current state of our business, and outline my plans for the firm.

I think of our business as a combination of several advisory firms with a large portfolio of securities. In order to have an honest reckoning of the state of the firm, it is necessary to value the portfolio under a global recessionary scenario which may last as long as 2 years, and a decrease in global GDP by about -1%.

Under this scenario, combined with a real estate bust in major Western markets, we see significant impairment in our securities portfolio. In all, we expect to take in excess of USD500bn in losses over the next two years or approximately 25% of total assets. These losses will occur across all portions of our business including subprime mortgages, prime mortgages, Alt A mortgages, small business loans, bonds, leveraged loans, lines of credit and consumer loans such as credit cards, auto loans.

As of today, our market capitalization stands at USD167bn, and our total long term debt stands at USD427bn. Over the course of the next 24 months, I expect that out equity will turn out to be worthless, and in addition our debt will be worth 78 cents on the dollar.

In addition, Citi is the counterparty to millions upon millions of trades, including repos, rehyphothecations, credit default swaps etc. We do not have an effective way of gauging losses on these trades in response to market movements. It is within the realm of possibility that we have additional billions of losses that we are not aware of yet.

We also do not know what terms lie in the hundreds of contracts we sign on a daily basis. Under what conditions do we have an obligation to consolidate our off balance sheet entities? When would we have to post collateral on our CDS contracts? As the machine which is the contract grinds forward, we are as susceptible as anyone to surprises.

I propose from this day forward to cease paying dividends indefinitely, this would increase cash available to debtholder USD11bn annually. I also propose to pay all bonuses in the form of restricted stock which will have to be held for 5 years.

I propose from this day onward to cease making new loans of any sort until capital position is sorted out. If the government wants us to make loans, it better give us the money.

I propose to split Citigroup into 4 different parts: a retail and corporate bank providing loans, an investment bank providing advice, a brokerage and wealth management firm, an insurance firm. The hedge fund, private equity and proprietary trading desks will be allowed to buy themselves out, sold or terminated. They will no longer have access to the bank’s capital.

I will ask for the US, EU and other national governments in each jurisdiction that Citigroup has operation in to participate in a global bailout. The capital received will be senior to all existing equity and debt, but junior to customer deposits in order to avoid a bank run. Each national government will be asked to guarantee every penny of customer deposits. This action, combined with writedowns of assets to realistic market values, will result in the nationalization and loss of control of most of Citi’s international businesses.

Our board is composed of highly respected individuals who are not really that interested in our business. If Chuck Prince, who spent every moment looking at our business did not completely understand it, then what hope is there for luminaries such as Richard Parsons, who couldn’t tell a CDO from a good HBO episode of Sopranos? Bob Rubin is a great man, but he’s our schmoozer in chief, not a manager of our business. The last time Win Bischoff actually did anything in banking, derivatives were something you did in calculus.

In short, I am in complete control, and rule the board through fear of exposing their incompetence.

I could have come up here and done the usual CEO rigmarole. Oh yeah business is great, things are looking up, the music will start and we’ll keep dancing… Our portfolio has been cleansed and has now top notch securities… Great franchise, we’ll never break up.. our board is stunning… etc etc.  But in fact this would only give some meagre support to shareholders and fleece sovereign wealth funds into buying our worthless shares.

No, I care more for being honest, and keeping it real. In 12 months, I want to be able to say I was right, rather than going on the Charlie Rose show and saying how when the facts change, I change my mind.

This speech also ensures that I won’t lose my job for poor performance next year, because I’ve already revealed exactly how abysmal performance really is right now. So all you fools who just think I’m a seatwarmer who’ll announce the bad results and then be axed, this’ll show you..

Ya Trick Yar!

The reaction to that honest speech should have been Citi’s share price plummetting immediately to below USD1, all other banks suffering the same fate. No financial institution would have been able to raise capital for the next year, and there would have been riots on the street as banks stopped lending.

Contrary to the tone of the letter above, this piece is actually a defense of Vikram Pandit. Sometimes you need liars and cheats to get us through the bad times by telling us its not really that bad.

January 15, 2009 Posted by | Uncategorized | , , | Leave a comment