Citi Has Few Options Left

What happened? It looked like City was going to weather the storm? Just a few weeks ago, the bank stood as one of the few survivors of the collapse on Wall Street which took down Lehman Brothers and forced Goldman Sachs and Morgan Stanley to convert into bank holding companies. In fact, Citi was asked by the government to acquire another victim of the financial meltdown – Wachovia. Now, Citi itself is on the operating table waiting for life support. What happened to what used to be the world’s biggest and mightiest financial services institution?

Things really started going south for Citi with the aborted Wachovia deal. Although the deal was a marriage pre-arranged by the government (which was to absorb billions of Wachovia’s bad loans) Citi failed to close. Wells Fargo came in just days after the announcement of the potential Citi takeover with a lot more cash in hand. What followed were a few days of legal battles during which Citigroup tried to put a restraining order in place to protect its deal with Wachovia. Eventually, Citi walked away which in the eyes of many was a sign of weakness since it could not match what Wells Fargo was offering. Citi was the clear loser here.

This lead to lots of talk about Citi’s continuing losses and internal structural weaknesses. That kind of talk can be the beginning of the end for banks in the current market, especially after Hank Paulson announced that TARP funds will not be used for mopping up toxic debt, as originally announced. It did not help that in the meantime Citi won a couple of law suits. Other bad news piled on. Citi announced that it will cut additional 50,000 jobs and will have to bring more bad debt on its books. Put all this together and you get a very nasty mix leading to a week during which the bank lost more than 50% of its stock value.

Right now the only viable option for Citi is some kind of government intervention. I don’t think that a merger with another institution is possible. There are no players that have the capacity to digest a merger with Citibank (even with a market cap at $20.5 billion). Selling off parts of the business is also not going to save the bank. What is most likely is another cash infusion or partial nationalization. Citigroup may not be left to fail. Failure will result in a disaster for the financial industry. The sheer size and global presence of Citigroup will make the Lehman Brothers’ failure look like a child’s play.

Most likely, we will hear on Monday that the government is going to assume some of Citi’s bad debt or possibly acquire equity in the bank. The question now is what will be the terms of the Feds.

Eye-Deep in Hell in the Trenches of World War I

Exactly ninety years ago, on the eleventh hour of the eleventh day of the eleventh month, the guns on the Western Front fell silent as Germany signed an armistice with the Allies and the War to End All Wars was over. The European powers signed an armistice followed by the Treaty of Versailles that was (in retrospect) going to set the stage for even bigger and bloodier war. The Great War inspired many poets and writers, but one particular poem (actually, a fraction of a poem) has always embodied for me the bitterness, rage and desperation of the times.

Below is an excerpt from Hugh Selwyn Mauberley by Ezra Pound. This is one of his works before his mind descended into madness party because of the war and the friends that he lost on the battlefield (hat tip to Sans Everything).

IV.
These fought, in any case,
And some believing, pro domo, in any case ...

Some quick to arm,
some for adventure,
some from fear of weakness,
some from fear of censure,
some for love of slaughter, in imagination,
learning later . . .
some in fear, learning love of slaughter;
Died some "pro patria, non dulce non et decor". .
walked eye-deep in hell
believing in old men's lies, then unbelieving
came home, home to a lie,
home to many deceits,
home to old lies and new infamy;
usury age-old and age-thick
and liars in public places.
Daring as never before, wastage as never before.
Young blood and high blood,
Fair cheeks, and fine bodies;
fortitude as never before
frankness as never before,
disillusions as never told in the old days,
hysterias, trench confessions,
laughter out of dead bellies.

The Latin is reference to Horace: “Dulce et decorum est pro patria mori” (Sweet and proper is to die for your country).

Barack Obama Wins

There was a saying to the effect that great leaders emerge in testing times. In a time of crisis somebody is being ushered on stage to take charge and lead. I am pretty sure that this is what voters in America confirmed on November 4. Barack Hussein Obama is the next president-elect of the United States. What a triumph! He was the candidate who wasn’t given much of a chance when he initially announced his candidacy for office. Yes, a new and interesting face, but that was it. Everybody was focused on Hilary Clinton and John Edwards on the Dem side. Not only did Obama outsmart (and outspend) the Clinton dynasty in the primaries, but he won by quite a margin yesterday against John McCain and the Republican political machine.

Watching the Grant Park rally in Chicago last night was moving. I have to say that I had a lump in my throat watching people’s faces as they listened to Obama. The emotion was quite palpable. You could feel the optimism, the belief that things will really change for the better. I am glad I witnessed this (and kick myself for not being there in person). The speech itself was brilliant. I just marveled at Obama’s eloquence and delivery.

McCain’s speech conceding the race was also quite good and, yes, graceful. He reminded again of the McCain we were used to see, the guy who was liked by so many, the old war hero. If he was like that and had less Palin and more Arnold during his campaign, the result might have been different. No matter what he did, though, McCain was doomed by the shadow of W and Palin. I kind of feel sorry for him because this was his last shot at running for president. He should have been elected as president back in 2000. I bet America and the world would have looked a lot better than they do today.

Back to Obama. Excitement is all good, but the reality is that he is facing some Herculean tasks. When he started running for the job, the issues were the wars in Iraq and Afghanistan and the usual cultural “wars”. Now we’ve got the economy going downhill and the markets crushing every other day. There is quite a bit on your plate, Barack. Which brings me back to my original point. After seeing Obama run his campaign, his steady hand, sound judgment and ability to go against the odds, I think he will not disappoint. In fact, I think America will emerge from the current mess better and stronger than before. Will wait and see.

New Name: Adventure Capital Law

Yes, as you can see, I am scrapping the blog's old name for something more descriptive of my interests and pursuits. Not that the old name was that bad... it was just too general. It looked like an attempt to say too much and thus said too little. Now I will try to narrow my focus to the three topics above (or maybe just one, if that is how you read it) and all the other related stuff that comes with them.