Finanical Markets React to Citibank Black Hole for Tax Payers Dollars

By: PaddyPowerTrader

Stocks fell for the fifth session in a row last Friday. But that really seems a long time ago now with the news coming fast and loose over the weekend. And yes the news flow is dominated by those pesky banks again with the artist formerly known as the world largest financial, Citibank, taking centre stage and proving it's nothing but a black hole for taxpayers dollars. Like Sisyphus, policymakers seem to be pushing a rock up a mountain only to see it roll down again time and time again as the boulder gets bigger and the incline steeper.

Today's Market Moving Stories

• Sentiment on Asian markets was soured by the news that Japanese lender SFCG has filed for bankruptcy with $3.6bn of liabilities.
• Gold mining stocks were the star performers after the price of the precious metal punched through the psychological $1,000 a troy ounce. Bullion still beats all, it seems, at those suburban gold parties .
• Another bank working on a much less ambitious project than global domination is RBS, who are set to announce a radical restructuring (retrenchment) of the group which will see it split itself into two units They will exit about half of the 60 countries in which they operate, shed thousands of jobs as it endeavours to save £1bn. The stock is up 15% this morning. Oh and we lost another bank, Silver Falls Bank , the 14th U.S. bank shuttered this year.
• UK weekend press speculating just what the asset protection scheme ( bad bank ) will look like. General consensus for the size of the scheme is now totting up to £500bn. I don't expect to get the full details until RBS results on Thursday. Probably good for equities but debt markets still in recoil. Sunday Times also helpfully pointing out that the government appears to have few qualms in over-riding contract law at least as far as the debt markets are concerned. There are also suggestions that the government will inject capital so that Northern Rock can increase mortgage lending again. We have heard this one before and realistically it amounts to not much more than an excuse not to have to stick with the government's unrealistic plans to sell the bank in 2011.
• The Irish authorities are likely to watch the emergence of the UK insurance program very closely as the need for a replication of its workings becomes more important in the road to recovery for the domestic sector.
• Dubai gets a $10bn loan from Abu Dhabi; that's half Dubai's outstanding bond debt and less than a football club these days.

Citigroup To Be Part-Nationalised
So the music has finally stopped then Chuck! Sure, Citigroup's funding costs will come down, but the problem is that the public and the private shareholders have different interests. This would be the third - third - government move to save Citigroup in the past six months. Once again, it seems a weak half-measure. The government needs to just step up and solve this problem once and for all by seizing 100% control of Citi, writing down its assets, restructuring it, and selling it off. The reality is that the current policy of merely injecting capital into financially unviable companies will merely prolong the recession as it did in Japan in the 1990s and result in the continuance of “zombie” institutions, ultimately dragging down healthy companies with them.

As I noted many months ago when reflecting on the Swedish approach to their crisis, nationalisation may be the best option as Sweden successfully did early in the 90s. Once banks balance sheets were restored to health the institutions were moved back into the private sector at a profit. This was in stark contrast to the Japanese example and the results were massively different. Unlike Japan's “lost decade”, Sweden was able to get out of crisis relatively quickly and more strongly than it otherwise would have done.

Bet they're not dancing at Bank of America either. They have denied that similar government intervention talks are taking place with respect to its own stock, but the denial is far from convincing. Watch this space.

Comment On Bank Bailouts
Despite government denials, the nationalisation of a big chunk of US and European banks is being considered because so many global banks are insolvent due to the losses they have failed to accurately write down and which they continue to conceal. Stock markets are falling again because the world now realises that there are still at least two more ‘ sub-primes ' yet to be announced by global banks.

The first is the complex topic of synthetic CDO losses. It is a melancholy irony that much of the $500 billion to $US1 trillion to be invested in bad bank assets via the Geithner TARP …er, Financial Stability Plan…will go into instruments that were meant to insure the banks against loss, synthetic CDOs. That's why there was so little detail in Timothy Geithner 's speech and why the markets were so dismayed to read it.

The second ‘sub-prime' is the lending from the big European banks to Eastern European people in Swiss francs. Their losses may equal sub-prime losses because the customers can't pay the inflated loan totals thanks to the collapse of Eastern European currencies. At the same time the bank executives who got us into this mess are using government money to pay bonuses.

Collapsing PMIs Pave The Way For A Significant ECB Rate Cut
The flash estimates of both the Eurozone manufacturing and services PMIs for February hit new all-time lows at 33.6 (vs 35.0 in January) and 38.9 (vs 42.4 in January) respectively. These developments, which drag the composite PMI down to 36.2 from 38.3 in January, hold grim auspices for Q1 09 Eurozone GDP growth and raise the odds for a bigger-than-50bps ECB cut in March.

The horrific February PMI figures should have finally put the words ‘the end' to the optimistic scenario that the worst for the Euro area economy is already behind us and that a stabilisation in the pace of decline will occur in Q1 09. In fact, the batch of upside surprises in several key Eurozone economic surveys during the month of January have already been wiped out by a series of new all-time lows in February. As such, all signs are in place for a V-shaped growth type scenario to be replaced by a more pessimistic, but more realistic ‘Nike-swoosh'-shaped one, with no significant signs of recovery in economic activity until early 2010.

Although market players have once again taken in stride the gloomy pieces of news from the Eurozone economy, the ECB is unlikely to do so at its March meeting. In fact, I look for a significant debate within the two camps of the governing council (conservative vs. the more proactive) between a 50bps and a 100bps move. Watch out next for the February EU commission indicators, which will show more bad news.

Earnings Today
From the US there is Berkshire Hathaway (expected EPS $1,485.50), Campbell's Soup ($0.64), Fannie Mae ($-2.69), Freddie Mac ($-10.27), Heinz ($-0.05) and KKR ($0.34).

And Finally… A Handy Guide To The Crisis Of Credit

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

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