Monday, November 24, 2008

Some Direction At Last, Some Market Leadership


Well, this post is written after the plan by FDIC and Treasury on Citigroup. So, where are we now? The first thing was Obama made the right choice in appointing Timothy Geithner (please reread posting on the new Treasury Secretary). The market basically rallied over 4% on Friday over the news. Can the appointment alone charge up markets? Yes, especially in the current market situation where there is little confidence, little direction, high volatility, basically no market leadership.

The best thing for Geithner to do is to grab the markets by the neck and tell them "This is the way ahead, follow me and I will guide you towards the light (no pun intended, obviously)".
Geithner, as mentioned before is a market interventionist. He was critical in lining up the JP Morgan / Bear Stearns deal, he was instrumental in getting the funding for AIG, he tried to save Lehman but was dissuaded by higher powers ...

The market basically saw in Tim, a person who will not let things get blown out of his control. It was very easy to predict what he would do in a Citigroup situation. The new rescue package for Citigroup was assembled with Tim's input, and it was a package that tries to cover even the most extreme situation Citigroup could find itself in.
Naturally there will be many naysayers that will criticise that the package will not work.

To me, its a very substantive package, watch the shorts try to stampede out of Citigroup in a hurry tonight.
Why is the package so good? I did mention that Treasure could follow the UK prescription for Royal Bank of Scotland, whereby they injected capital for actual shares, thus controlling the bank. Instead a softer version was adopted, the Swiss version, on how they bailed out UBS. But in reality, the package is a Swiss UBS package with a subsequent evolvement to the UK RBS method as future losses, above the preset levels, will see the government absorbing the loss in exchange of an equity stake in Citi - so prediction stayed true.

First, there is the additional $20bn capital. Two, the guarantee on $300bn of toxic assets, phew. Thirdly Citi is only liable for the first $29bn of losses, as I mentioned earlier, without the package, Citi would probably have to incur losses totalling at least $50bn for the next 3 quarters. Now that has been largely eliminated.


Fourthly, most importantly, confidence is restored. Global bank run on deposits would now start to reverse. Fifthly, no dividends for 3 years (or just 1 cents actually) - this has to come from the government as management has no balls to say no more dividends (Alaweed no happy man, no feel like smiling).

The 8% payment on $7bn to Treasury is a cheap way to raise funds. This move will make it SO MUCH EASIER for Citi to go to sovereign wealth funds to tap additional capital. Mark my words, Citi will easily raise another $10-15bn within weeks, which will further boost its defence system.After the deal, Citi's Tier 1 capital ratio at Sept. 30, on a pro-forma basis assuming the October capital injection and the new capital announced on Sunday, is expected to be 14.8%. Its tangible common equity would be about 9.3% of risk-weighted managed assets, Citi said.


We have market leadership. Expect a sharp revival in Citi, and possibly a new bottom at 8,000 for the Dow.

p/s photos: Haruna Yabuki


5 comments:

solomon said...

Not knowing what is the exact reason for the last hour fall in Dows for the past few session, with bad news temporarily coming to an end, I highly expect the US market to have bear rally into JANuary.

I agree with Dali that the market is looking for new dimension, be it new leader or new horizon. In short, looking for feel good excitement for bear rally.

If the World equities could recover some ground, and with leaders determination, it will facilitate the new financial system buildup.

Stimulus package is good, but u need the feel good factors in equities. Both measures will then bring the world out of deep recession with the combination of higher public spending and higher private consumption via higher wealth generation.

Ivan said...

how about the big 3 auto company? no need to help liao?

Gamelion said...

How i wish to own that very special
magical printing money machine. All your financial money problems will be gone immediately !!!!!!

Gamelion said...

Can we avoid the same Depression era happen in 1930 when now we have more sophisticated and complicated/hard to value debts of derivative markets about to implode than that period ?

or can we totally avoid a massive nuclear hydrogen bomb holocaust when compare to that 1930 era of simple gun and TNT bombs machination ????

Salvatore_Dali said...

gamelion,

yes we are well on the way to avoiding a repeat of 1932