Fascinating expose on Citicorp & the illusions on Wall St.
Anyone wonder how Goldman Sachs, JP Morgan et al can bring all of these IPO's public, with all of that due diligence; sell all these Telecom Bonds, issue all those analyst reports with 10 year discounted cash flow analysis etc - and then have all those companies crash & burn from $60 to $3 and stay in business, let alone out of jail ?
How can an Investment Bank; bring public a company & value it at $20, watch it run to $60; issue a price target of $100, with a strong buy & glowing analysis; only to see it crash & burn to $3, or even bankruptcy months later ?
If the Government issued currency that depreciated to that degree there would be a total economic collapse & civil unrest in the streets.
If Ford, Chrysler , or GM sold an automobile for $60,000 that months later was only worth $3,000 - they'd be out of business.... but; not Goldman, JPM, Saloman Bros et al...
Here is an interesting expose on Citicorp:
... it is ominous how much power, influence & control a single company can have and it is very shocking on how such an empire can be built upon a series of accounting practices that creates a virtual house of cards.
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billparish.com
Merger Scheme Exhausts Citigroup Capital and The Federal Reserve Remains Silent
This footnote, search using term " capital under regulatory" claims that Citigroup has $61B in capital. What is not disclosed is that the acquisitions of Salomon Smith Barney and Citicorp, if not using the pooling loophole, would have resulted in goodwill charges in excess of $40 billion. Both were purchased for more than two times book value and the difference between book value and the value paid is required to be recorded as goodwill if the pooling loophole were not used. This loophole, accounting illusion, has therefore resulted in the nation's largest bank "running on empty" with respect to real capital.
This is an unacceptable situation given Citigroup's exposure to insurance related risks and a deposit base that could be unstable since 75 percent of deposits are in foreign branches outside the U.S. In addition, the current earnings level is predicated on fee gouging and generally abusive sales practices involving annuities, high credit card fees and other such products. Also noteworthy is Citigroup's position as a leader in syndicated lending and the issuance of complex derivative products. For example, Citigroup led a loan syndication for the Xerox Corporation which is now struggling with a cash crisis.
In a related coincidental matter, less than two weeks after posting my initial report on Citigroup, the company announced a new "shelf debt/equity offering" of $20 billion. One might ask, why is a financial institution trading at 5 times book with a market value of $250 billion issuing this much new debt and equity?
Pooling based mergers between banks are bad enough yet when an insurance company like Travelers is allowed to purchase the biggest bank in the country and run on no real capital and engage in a variety of abusive practices, many of which directly undermine the "new economy," it is nothing but a spectacular financial fraud upon its own long-term investors, the pension system, employees and taxpayers.
46. Greenspan Urges Law to Simplify Derivative Treatment if Major Firm Goes Bankrupt, Reuters, Oct. 20, 2000
This legislation aims to allow the speedy resolution of derivatives contracts held by a bankrupt financial firm rather than having them tied up in bankruptcy court, where delay could spread the firm's problems to others involved in the deals. Among other things, it would permit the ``netting'' -- or offsetting -- of all the derivatives contracts between a bankrupt financial firm and a counterparty to quickly arrive at a single outstanding claim. ``It would reduce the likelihood that incidents such as the near-collapse of Long-Term Capital Management in September 1998 would pose a broader threat to our financial system,'' Summers and Greenspan said. The effort has near-universal support in Congress, but has become snarled in controversy surrounding a broader overhaul of U.S. consumer bankruptcy laws. The House has already passed the broader bankruptcy bill, which contains the derivatives provisions, and the Senate may follow suit next week. But the White House has threatened a veto, making it unlikely to be enacted this year. 47. FDIC Report Discloses Citigroup Had $4.8 Trillion in "Off Balance Sheet Derivatives" on June 30, 2000
This report can be accessed by selecting the above link which takes you to the FDIC Web site followed by selecting "individual bank data" from the menu on the left. Then select "Institution Directory" followed by "Find Bank Holding Company" from the yellow menu at top of page. Now input "Citigroup" for BHC name and select find followed by clicking on the Bank ID #. This will bring up a summary of assets and liabilities report, line 44 of which contains this information on derivatives. It is truly astonishing that Citigroup did not do what was necessary to pass this most important legislation regarding derivatives advocated by Alan Greenspan and Treasury Secretary Summers.
47.1 Xerox Tries to Avert Repurchasing Derivatives if Rating Cut, J. Niedzielski, Dow Jones News, Nov. 20, 2000
Xerox may be required to buy back as much as $240 million of outstanding derivatives if its credit rating is cut, it disclosed in an SEC filing. This again highlights the unique risk of derivatives, especially if Xerox were forced into bankruptcy and unable to meet its obligation, potentially creating a ripple effect throughout the financial system.
(interesting comment on Citigroup's recent purchase of some Associates finance branches & assets as well as consumer finance company - Commercial Credit)
..."Associates is clearly overleveraged since they have no deposit base and to allow Citigroup to buy Associates, given that Citigroup is already seriously undercapitalized in real terms and could also have a major balance problem with its investment portfolio for reasons outlined in this report, would result in a monumental fraud on the American taxpayer since Citigroup would be overleveraged and its deposits are insured by the FDIC. 83. Citigroup has 4.5 billion shares outstanding on November 13, 2000:
This does not include roughly 450 million new shares that will be printed up for the pending Associated First Capital (AFC) acquisition. Also not included are more than 300 million shares owed to employees in stock option commitments. What this means is that for every $1 increase in Citigroup's stock, the market value of the firm increases $5 billion or more than half the entire current annual net income. It also means that paying adequate dividends, necessary for a bank, is a mathematical impossibility. There are simply too many shares outstanding and the company has become a "watered stock." Both the Office of the Comptroller of the Currency (OCC) and FDIC regulators should be particularly concerned and block any further merger attempts by Citigroup. The Federal Reserve should also be concerned regarding the leverage built into Citigroup's stock price. Clearly, what is deceiving investors is a price/earnings ratio of 18, making them believe Citigroup is a "value stock." In reality, a large percentage of the company's earnings are resulting from the pooling loophole and represent an unsustainable fee pyramid, in particular in the investment banking and credit card areas.
Aggressive financial engineering with these mergers, in particular the excessive use of the pooling loophole, has resulted in the nation's largest bank running on empty with respect to "real capital."
Citigroup's total market value, with AFC, is now $260 billion, exceeding all tech firms except Microsoft and Cisco SystemsIn addition, the share price of $50 is five times the book value of $11. This is remarkable for a bank in which a share price of two times book is considered highly valued. Banks generally trade at discounts to book since they are simply intermediaries.
Many industry analysts consider Citigroup a "value stock" yet are unaware of what is occurring and do not see the risk created by Citigroup siphoning off new economy investment capital in the form of excess fees.
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... it is said that any "market" is truly only as strong as the "financials" are.
Spend some time & read the link to that expose on Citicorp, read about the accounting practices, the derivative exposure, the huge portion of its net income that is "junk fee's" from risky consumer finance etc... and ask yourself if this "King of all Financials" is not indicative of the grande illusion that exists in this bubble of a stock market.
If by chance we would see a true Market Crash to historic Bear Market valuation multiples; we would witness the greatest transfer of wealth from the average citizen's 401K, Pension Plan, saving & brokerage accounts to that of the Investment Bankers in history... and we may never be the same...
1929 can't ever happen again ?
The more I dig; the more I am sure of one thing; if not now/soon - when would/could it happen ?
- this "grande illusion" House of Cards surely can not support another single layer. Can the smoke & mirrors continue to hide the illusion much longer ?
And you wonder why Gold, why now ?
... if not now; when, or why ? |
