Just a Little Off the Top
| Wed Mar. 11, 2009 2:45 PM PDT
Yesterday Citigroup announced that it had been profitable in January and February and the stock market rejoiced. Citigroup shares jumped 50%. But how about their bonds, probably a better measure of what the market really thinks of Citi's chances of surviving? Answer: not so good.
U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month....The concern among debt holders is reflected in Citigroup’s $789 million outstanding in 7.25 percent subordinated notes due in October 2010, which fell 7 cents today to 70 cents on the dollar and have lost 23.7 cents in the past three weeks.
Italics mine. 70 cents on the dollar, eh? Basically, this means that Vikram Pandit's cheery memos notwithstanding, the market already figures that either (a) Citi will eventually be forced into some kind of debt-for-equity swap that will slash the value of their claims, or (b) the government will nationalize Citigroup and then decide not to pay off bondholders at par. This is bad for current bondholders, but Felix Salmon thinks low bond prices will eventually attract the bottom feeders:
Increasingly they're going to start representing significant potential gains for people who are buying at today's levels and hoping to be paid off at par — paid off, that is, essentially by taxpayers. Since those people can be broadly characterized as hedge-fund managers, one can foresee a lot of Congressional pushback if a large number of hedgies start pulling in tens of millions of dollars just by playing the moral hazard trade. Or, to put it another way, it's a lot easier to impose a haircut when a haircut is priced in than when it isn't.
Right. If hedge funds start buying up Citi's bonds at 70 cents on the dollar, hoping that eventually the bank will be nationalized and its obligations guaranteed by the U.S. government, they've probably got another thing coming. It's one thing to pay off bondholders who invested years ago in good faith, but quite another to pay off speculators hoping to cash in on a taxpayer bailout.
Still, it's tricky. After all, how do you tell the speculators apart from the other creditors? You can't. So either everyone gets a haircut or no one does. And if everyone does, nobody quite knows what will happen. Bottom line: buying Citi bonds at current prices might be a good deal, but only if you have nerves of steel. Their future is murky indeed.Advertisement
Advertisement
Comments
"Another think coming" beats
Submitted by SP (not verified) on Wed Mar. 11, 2009 3:09 PM PDT.
"Another think coming" beats "Another thing coming" in a googlefight by 10 to 1. Make sure you tow the line in your grammar usage.
It can be both.
Submitted by BigTom (not verified) on Wed Mar. 11, 2009 5:53 PM PDT.
Lets say if a speculator buys the bond for .70 to a dollar, and the government/remants of Citi assets pay off at .85. Then the speculator makes a modest profit, and the long term bondholder a modest haircut. And in the meantime, a longterm holder who has hit a bad patch, and needs to sell today gets a better price today than would be possible without the potential for the "moral hazard" profit. Unless there are different rules, for say little old ladies retirements funds, versus hedge funds, there is no way to square this problem. And of course the (future) taxpayers take it on the chin either way.
It's not GRAMMAR
Submitted by Swift Loris (not verified) on Thu Mar. 12, 2009 1:15 AM PDT.
It's SENSE. "Another thing coming" makes no sense. It's "another THINK coming," which makes perfect sense. The use of think as a noun has been around since 1834, according to my dictionary.
(But SP, it's toe the line, not "tow" the line!)
You might be right...
Submitted by Godless Heathen at work (not verified) on Thu Mar. 12, 2009 4:25 AM PDT.
For all I know, the phrase could be "another think coming," but it's a bit obtuse to say that "another thing coming" makes no sense. Let's fill in the rest of the statement... "Well, if that's what you think, you've got another thing coming" (as in, you will end up with a "thing" or result that is contrary to what you are expecting from the situation). In fact, it's hardly "sense" to know that "think" was used as a noun in the 1840s and probably well into the 20th century, but not with anything resembling common usage today. If anything, this is a matter of USAGE and not GRAMMAR or SENSE.
We have a valuation - Treasury should use it!
Submitted by low-tech cyclist on Thu Mar. 12, 2009 2:25 AM PDT.
If Citi's bonds are selling at 70 cents on the dollar, the government ought to simply make an offer the bondholders can't refuse. Tell them that the government will buy them ALL up at that price - but you're either on the bus or off the bus; you sell your Citi bonds to the Treasury at that rate by the end of the month, or you're on your own: after April 1, the government will treat all remaining Citi bonds as worthless, and won't rescue anyone.
If you bought Citi's bonds a long time ago, you've still been aware that they've been an iffy investment. They've been selling at better prices than .70 to the dollar recently; you've had your chance to get out with a smaller haircut. You didn't take it? Tough.
Addenda
Submitted by low-tech cyclist on Thu Mar. 12, 2009 4:46 AM PDT.
I should have said, "If you bought Citi's bonds a long time ago, you've still been aware latelythat they've been an iffy investment."
If you're going to invest in stocks and bonds of a particular corporation, you owe it to yourself to, at a minimum, stay aware of changes in the prognosis for the long-term health of that corporation. If you're not up to that, your money should be in Treasuries or an index fund or something. (Not that the index fund would have done well over the past year or two either, but it's not going to go to zero, either.)
Ever since it became clear last year that Citibank was in trouble, all bondholders have been in the same situation: they could have sold anytime, and taken whatever haircut that resulted in, or they could have let it ride, which was a decision to gamble on either Citibank or the taxpayers coming through for them.
At this point, there's no ground for distinguishing between the gamblers and the long-term bondholders: they've all been gamblers for several months now. Offer 'em all a last chance at the same haircut.
Bond Payoff
Submitted by Seadust (not verified) on Thu Mar. 12, 2009 4:36 AM PDT.
Certainly there are records of when bond purchases are made. Should be easy to distinguish the speculators from the long-termers and pay off accordingly.
If the hedge funds are
Submitted by Anonymous (not verified) on Thu Mar. 12, 2009 6:18 AM PDT.
If the hedge funds are buying at $.70, then it's an implicit guarantee that the government will not force a haircut of more than $.20. In fact, the implicit guarantee to bailout the insiders, hedgefunds and the other malefactors in this catastrophe is more ironclad than any of the government's explicit guarantees.
You cannot legally
Submitted by Anonymous (not verified) on Thu Mar. 12, 2009 6:25 AM PDT.
You cannot legally distiguish the recent bondholders from longterm ones. Besides the logistics, the radical right wing judiciary would not stand for walstreet looters to suffer like that, and liberal judges would probably shoot it down too.
Maybe you could impose some sort of 100% capital gains tax on the subsequent sales of these bonds to the extent that they were bought for less than price the government decides to subsidizes (with no offsetting capital losses, unless those also resulted from the same class of bonds).
What short memeory span you
Submitted by Neal (not verified) on Thu Mar. 12, 2009 8:11 AM PDT.
What short memeory span you have.
The same day that Pandit sang his happy song, McClatchy came out with the story on present and future losses on Citi and 4 other banks based on a December 31 federal filing. You even posted on it.
For Citi, as of that date they had $140B in losses, and expected a further $161B in losses if the economy continued to tank. That was Decemeber 31st--things certainly have not improved so that additional $161B of losses is well on its way.
Their total expected losses add up to $301B. They have $108B in reserves against those losses.
$193B in losses beyond reserves.
And you're suprised at their bond prices???
34%
Submitted by neil wilson1 (not verified) on Thu Mar. 12, 2009 8:31 AM PDT.
I just did a quick calculation and you get get 34% on your money for 19 months on Citi bonds.
Remember, most of the mortgaged backed bonds were rated AAA. So ....
I would be tempted to buy at this price. I think there is a great chance that the nationalized Citi will pay off at par. We, the owners, shouldn't pay par but I think there is a good chance that WE will
Bank Nationalization Is Not Going to Happen
Submitted by bob h (not verified) on Thu Mar. 12, 2009 11:07 AM PDT.
The stock market is signalling that the worst of the banking crisis may be over.
We now have BofA and JP Morgan indicating that they will be profitable for the year and will not require additional TARP money. The likelihood of them or Wells Fargo being nationalized is exactly zero.
Citicorp has evidently returned to profitability and says it can absorb the coming write-downs, but there is considerable uncertainty to say the least. My guess is a continuation of the partial nationalization approach and mark-to-market forbearance that ushers the bank through to the recovery. In this skittish bond market, a 30% discount to par does not strongly indicate the likelihood of bankruptcy.
With only one big bank a possible candidate, the nationalization chorus is going to have to find something else to talk about. There is not going to be broad bank nationalization.
Post new comment
MoJo Comments: Send Us Your Feedback
We changed our spam software to better filter comments. Should you encounter any issues, please let us know.
