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To: ChanceIs who wrote (226024)	10/24/2009 12:26:45 PM
From: ChanceIs	Read Replies (1) \| Respond to of 306849

Whalen - Citi, BofA Still Face Huge Losses: Bondholders Must Share Taxpayers' Pain Posted Oct 06, 2009 07:30am EDT by Aaron Task Big banks were back in favor Monday, thanks to a Goldman Sachs upgrade. Meanwhile, Saudi Prince Alwaleed is imploring the U.S. government to "exit its investments" in TARP banks, notably Citigroup. Christopher Whalen, managing director at Institutional Risk Analytics, takes umbrage with the Goldman upgrade, as detailed here, and believes the Saudi Prince is missing a big piece of the puzzle: "For investors right now, you've got to look at large banks and remember [to ask] ‘to what degree is government subsidy making this bank look better than it really is?'" The answer is "a whole lot better," especially when it comes to Citigroup, Whalen says. Without government subsidies -- "all of things to help Citigroup look better - the bank would be in serious trouble," he says. "We'd be right back to where we were at the end of 2008 in terms of investors' perspective." If the government were to sell its stake and withdraw subsidies for Citigroup, the bank would be forced to raise cash again in the equity markets, Whalen continues. "The only way to do that is if they show us how to get the cancer out and leave a viable business behind. We're talking hundreds of billions of dollars of bad assets that really need to be charged off." The best way to restructure Citigroup - short of an FDIC-mandated bankruptcy - is for bondholders to convert say one-third of their debt into equity and "charge off the rancid assets," he says, noting FDIC Chair Sheila Bair made similarly themed suggestions. That would reduce the company's net interest expense dramatically, generating free cash flow and removing solvency concerns, he says. "The next day, I would tell all my clients to buy...because it's clean." Whalen says a lack of political will in Washington and the powerful lobbying of big fixed-income houses like Pimco and BlackRock, as well as pension funds, is preventing such an outcome. The same story applies to Bank of America, which is "next in line behind Citigroup in terms of financial problems and could be back in the arms of the U.S. government by the middle of 2010," according to Whalen. "While the Big Media focuses on the personalities and political problems at BAC, we instead focus...on the rest of the story, namely the bank's festering off-balance sheet exposure." The problem with Bank of America and (to a less-imminent extent) Wells Fargo is, unlike JPMorgan which acquired WaMu after FDIC restructuring, they "still face the daunting task of cleaning up the mess left by the troubled acquisitions of Countrywide, Merrill Lynch and Wachovia," he writes.