Dec 252009

Ref: 09-036A of 25-Dec-2009 (Merry Christmas Day) Final update on 3 Jan, 2010
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Steven Spielberg is considered one of the most gifted and visionary director in the world. He could not only visualize but also gave concrete shapes to the characters that became life size symbols later. Unfortunately, he never handled a political, financial or economic theme for simple reason that he could not visualize the complexities of current financial crisis engulfing his own nation – United States of America.

President Obama, one of the rarest breed of gifted speakers, has turned into a con man. He is a successful diversionist not revisionist lawyer, Senator or President but to borrow the phrase from Jim Carrey’s dictionary – Liar and Liar.

I thought the uneducated Indians in the villages or woo doo tribes in sub-terrain landscape in African continent were the only bunch of superstitious religious zealots. Never before I thought that the educated mass of Americans could rival them in the practice of superstitions. If the Hindus, Muslims and Africans could follow their religious leaders blindly, the Americans too follow their political leaders with same zest and vigor. They also believe blindly or superstitiously that their King or President could do no wrong. They do not realize that USA is following a pattern of USSR and its days are now numbered

A good leader should be a good orator, but a good orator need not be a good leader. Sen. Obama, a distinguished orator, won his presidency not because of his strength but due to the weakness of GOP – or Republican Party badly bruised by erstwhile President George W Bush. He could use his oratory skills to whip up the anti-GOP sentiment to win the democratic nomination defeating the Hillary Clinton and then defeating John McCain to win the Presidency. In short, he won due to the default of the other.

Yes, he inherited the bad legacy of burning nation from the President Bush. Nothing new. Almost every President inherits some or the other bad legacy from predecessor. Even President Bush inherited the regime of artificial low interest rate from President Clinton, Rupert Rubin (then Treasury Secretary) and Alan Greenspan (Fed Chairman for 18 years by now) that sow the seeds of the massive derivative contagion.

President Obama forgot that he was appointed President for 4 years – up to January 2013 latest. Having seen his inadequacy to address the immediate financial problems, he set upon himself a convenient mode to divert the attention of the American people by any means. He adopted the following diversionary tactics successfully:

  1. He started showing moon to the American people. Having seen the oil prices zooming to $ 145 per gallon, he found convenient tool to exhort the American car manufacturers to “go green” and invest into green technology that would reduce oil consumption, pollution and carbon emission.
    1. Such cars to be commissioned by 2014 to 2016 when he will no longer be around.
    2. What is the point of talking such non-sense when the immediate need was to set the financial house in order, stop the mortgage hemorrhaging, foreclosures and create the jobs and help the local Auto manufacturers to dispose off the existing car inventory in the ware house and on assembly lines?
  2. He then became champion of another green technology – Solar Energy – which will take years and billions of dollars before that technology became available at reasonable cost on mass scale. Again, he was showing moon to the American people by showing distant calendar of 2016 to 2020.
  3. He became then the champion of “climate change” by spearheading campaign for actions for control of carbon emission and reserving and doling out hundreds of billions of dollars of unproven and non-focused technology or even concept.
    1. He was trying to interfere in the automatic self balancing system of the nature.
    2. He went all the way to Copenhagen in “freezing cold” to talk about “global warming”. Back home in all 4 North Eastern states from Washington DC and New York were engulfed in 5 to 8 feet deep snow or ice in freezing cold when he was devoting almost half the time of his presidency on global warming.
    3. Hey, Mr. President, there is snow and ice all around – where is the evidence of global warming?
    4. In Afghanistan and Iraq his US army was exploding disastrous bombs that were emitting more Carbon dioxide than one small plant in China. Did he end the war with immediate effect
    5. Osama and Al Qaida were blasting human and real bombs everywhere killing thousand of innocents and causing tons of carbon smokes from the bombing sites. Could he get the cooperation of Bin Laden for carbon emission control?
    6. In short, he was rushing into “abstract” and “non verifiable” concepts just to divert the attention of the American people.
  4. He planned and created hundreds of billions of package called “TARP Trillions” to resurrect the financial system.
    1. He was trying to kill the wealthy and efficient by chasing them all the way down to UBS, Switzerland by calling for names of 52,000 wealthy Americans who were reported to be tax dodgers.
    2. He was using hundreds of billions of new money thrown after bad money by lending support to bankrupt Citigroup, AIG, Fannie/Freddie Mae, Bank of America, Wells Fargo, Goldman Sachs, General Electric and host of other bad borrowers.
    3. In short he was trying to extract billions from efficient wealthy and passing on nearly 100 times more to inefficient banks, brokers and insurers.
  5. When he could not create jobs, he invented new slogans – by equaling Saving of Jobs as Creation of New jobs.
  6. When he found his plans were no longer working, he invented a new weapon. “Health Care Reform” which at the moment of this writing has almost become a law, spending over $ 1.3 trillions extra.
    1. Here again, he was showing moon again. He said that 33 millions of Americans would be insured immediately by taxing healthy Americans to pay for health insurance they no longer wanted.
    2. In short, he was hurting efficient wealth earners and healthy Americans. He did not like “efficiency” in earning income or wealth and building health.
    3. If you earn more, pay more to the state. If you are healthy, pay the tax or compulsory insurance or pay the fine ranging from $ 750 per person to $ 3000 per family of four. In other words, he became a “blood sucker” draining out the blood or pompous health from the healthy Americans.
    4. He showed the moon again by showing distant calendar. He said that American people will save $ 1.3 trillions over 10 years. Hey, Mr. President, you are elected to do job to have immediate benefit during your Presidency – that is – for 4 years lasting up to January 2013. Why do you indulge into actions that go beyond 10 years when you will no longer be around?
  7. He started chasing fat bonuses to Wall Street bankers which would affect at the most $ 5 to 10 billions. But he embarked upon a journey to guarantee the worthless debt of $ 306 billions of Citigroup. $ 306 billions amount to entire Corporate America’s tax collection for full fiscal year. Was Citigroup as single big entity that important to demand the resources of entire corporate world of America?
  8. He was clamoring about the deepest financial crisis over last 70 years. Hello President. Have you seen the Dow Jones index on this Christmas Eve? It is at 10,554. During the 1987 crash, the Dow dropped to less than 3000 which is about 22 years ago. If the financial crisis is of epic proportion, worst in 70 years, how come Dow Jones is still trading at 10,554 ( Up 7554 points or up by 251%?) Does it mean that the Dow is artificially supported at higher level by printing more and more money and giving to affiliated banks, brokers and funds to support the market by “artificial respiration”?
  9. It is evident that President Obama has been using his oratory skills to divert the attention of the American people from core issues. He ignores the hard realities and pushing up the abstract subjects which can not be verified or justified by proper rational.

In short, the entire country of United States has gone to the dogs. There are no care takers. The educated Americans have become docile and weakened mass who are loathe to seeing the hard realities.

They bother more about tiny Afghanistan than 3 time’s larger states at home. What is Afghanistan? No one heard its name in last 50 years until George Bush went into those rugged mountains to search the rats nicknamed Al Qaida. Afghanistan is a non entity – just piss it off. And get out of it in one week. When Afghans do not care about themselves, why should Americans or other NATO forces do? It is none of their business to be out there anyway.

In short the ordinary Americans have been blinded by their loyalty to their political leaders or Presidents, Senators and Congressmen. They are equally superstitious as the mumbo jumbo Africans, religious Muslim populace loyal to white or black robed Mullahs or Ayatollahs or ignorant Hindus in villages loyal to the saffron robed politicians or priests.

The situation in the country is worsening in almost every sphere. The economy is still sliding, jobs are being lost, interest rates are convulsing with upward bias, frustrations among the populace is growing, town hall meetings are getting restive, the TV media finally gave the thumbs down and started talking against the administration, the deficits are bulging into trillions, the foreclosures are now expanding canvas to high end properties, commercial properties are sinking further,

Freddie & Fannie Mae need no more bail outs but need blank checks from the government.

The Citigroup is still oozing purple blood with additional hundreds of billions getting sour, no one wants to take the helm of Bank of America and the Fed is devising new ways of raising rates by resorting to Term Deposit lending, instead of normal Fed Fund and Discount windows. AIG is still basking under microwave heat and wilting further and further. Financial frauds are coming to light with greater intensity.

The troubled banks are getting deeper and deeper in the mud. The FDIC is running out of funds, and almost all states find their finances stretched beyond sustenance. Nevertheless, the Fed and Treasury go on printing and also guaranteeing hundreds of billions of dollars as if there is no tomorrow.

Even new IPO are being withdrawn at increasing ferocity. A leading company like National Beef, a profitable company employing thousands, was unable to raise just $ 250 millions from the market, whereas bankrupt banks have been reported to be raising over hundreds of billions within 2 days.

List of Failed, Withdrawn & Postponed IPOs 2009 in USA
Company Name Action Date Action File Date Underwriter
National Beef 12/17/2009 Postponed 10/13/2009 BofA Merrill Lynch
Ellington Financial LLC 12/10/2009 Postponed 7/14/2009 Credit Suisse
Trony Solar Holdings 12/9/2009 Postponed 10/30/2009 J.P. Morgan
Chesapeake Lodging Trust 12/8/2009 Postponed 9/28/2009 J.P. Morgan
Edgen Murray Limited 12/8/2009 Withdrawn 9/24/2008 Jefferies
Aviv REIT 12/7/2009 Withdrawn 6/30/2008 Morgan Stanley
Birds Eye Foods 11/20/2009 Withdrawn 10/8/2009 J.P. Morgan
HealthPort 11/19/2009 Postponed 8/17/2009 Deutsche Bank
Gomez 11/9/2009 Withdrawn 5/7/2008 Credit Suisse
PlainsCapital 11/4/2009 Postponed 8/26/2009 J.P. Morgan
AEI 10/29/2009 Postponed 8/18/2009 Goldman Sachs
Rexnord Holdings 10/16/2009 Withdrawn 7/18/2008 Goldman Sachs
Ladder Capital Realty Finance 9/29/2009 Postponed 7/17/2009 J.P. Morgan
Mistral Acquisition Company 9/25/2009 Withdrawn 1/18/2008 BofA Merrill Lynch
Foursquare Capital 9/24/2009 Postponed 7/9/2009 BofA Merrill Lynch
China Growth Alliance 9/16/2009 Withdrawn 3/18/2008 Jesup & Lamont
Orbit Acquisition 9/8/2009 Withdrawn 2/27/2008 J.P. Morgan
Open Link Financial 8/31/2009 Withdrawn 5/12/2008 Credit Suisse
Sutherland Asset Management 8/7/2009 Postponed 5/21/2009 UBS Investment Bank
Vought Aircraft Holdings, Inc. 7/24/2009 Withdrawn 5/16/2008 Lehman Brothers
GCL Silicon Technology 7/17/2009 Withdrawn 7/18/2008 Morgan Stanley
Galiot Capital 7/7/2009 Withdrawn 3/12/2008 Deutsche Bank
Rhino Resources 6/17/2009 Withdrawn 4/16/2008 Morgan Stanley
GF Acquisition 6/17/2009 Withdrawn 4/21/2008 Pali Capital
ASM Acquisition Company Ltd. 6/4/2009 Withdrawn 1/9/2008 UBS Investment Bank
Noble Environmental Power 6/3/2009 Withdrawn 5/8/2008 J.P. Morgan
NextG Networks 5/22/2009 Withdrawn 6/5/2008 Merrill Lynch
Source Photonics 4/15/2009 Withdrawn 12/26/2007 Cowen & Company
Current Media 4/13/2009 Withdrawn 1/28/2008 J.P. Morgan
Alimera Sciences–old 4/9/2009 Withdrawn 7/1/2008 Credit Suisse
RAI Acquisition Corp. 3/26/2009 Withdrawn 1/7/2008 J.P. Morgan
Valor Computerized Systems 3/24/2009 Withdrawn 1/11/2008 Thomas Weisel
McJunkin Red Man 3/16/2009 Withdrawn 8/20/2008 Goldman Sachs
Madison Square Capital 3/13/2009 Postponed 4/25/2008 FBR Capital Markets
SMG Indium Resources 2/27/2009 Withdrawn 2/27/2008 Maxim Group LLC
O’Gara Group 2/17/2009 Postponed 8/22/2008 Morgan Keegan
Changing World Technologies 2/13/2009 Withdrawn 8/12/2008 WR Hambrecht

Are derivatives dead? I do not think so – the Fed and Treasury appear to have been using derivatives with increasing ferocity through JP Morgan Chase and HSBC to short the gold/silver and buying $ index to retain the foreigner’s interest in the country. Attempts are now being made to weaken the United Kingdom by arranging downgrade, so that the Asian reserves do not get diverted to British Pound. Further, British pound is having less weightage ( %), so the risk in physical delivery is relatively less than Euro ($ Index Weight %)

The above summaries are derived from the detailed analysis of the following specific developments in every sector/company.

  1. 1. Citigroup:

Ever since losing billions of dollars in Latin American countries around 1992, this bank with Chase (now JP Morgan Chase) has been refining its balance sheets by using exotic derivatives in US and mostly offshore centers. It really has no core business. It is one of the larges assets shufflers in the world. Its balance sheet size, about $ 92 billions in 1992 – pre take over of Travelers group, has grown 22 times to $ 2.1 trillions before current meltdown, that is over 100% per year for 17 years. Unbelievable!

  1. The official lending was $ 45 billions in TARP funds; its worthless bonds were guaranteed $306 billions by US administration under great Hank Paulson (ex- Goldman Sachs) and Ben Bernanke, making it investment grade AAA securities overnight. That could be the main reason for Goldman Sachs massive surge in profits. They probably knew earlier what was to come.
  2. US-A (= US Administration) reported that Citi paid back $ 25 billions of TARP money. Did Citi have cash to repay? No, so how did they pay back? They converted $25 billions of TARP Debt into equity shares. That is, they repaid by book entry – one pocket to another.
  3. US-A further reported that Citi would pay back $ 20 billions from new capital raised. How did they raise the capital in such worse financial scenario? The identities of new investors were not known who paid such humongous sum, who are those idiots or White Knights willing to invest billions into this bankrupt bank? Why their names are not disclosed when they have taken substantial stake into this group. This is mandatory disclosure.
  4. Even Abu Dhabi Investment Fund (Sovereign funds) served notice on Citigroup to cancel their financial arrangement or refund them damages of over $ 4 billions.
  5. A New York Times article recently said that the bank’s “moves will result in a $10.1 billion hit to Citigroup’s fourth-quarter results… (Source: American Banking News)
  6. So, the Citi is losing in billions and has no public profile to raise $ 20 billions. Why does it want to repay the TARP billions even on paper? Because they want to avoid answering Senate and need permission to pay millions of dollars of pay packages. In India, there is a popular saying – Behti ganga me haath dho lo – that is rechristen yourself by taking a dip in flowing holy Ganges even if it is dirty and polluted.
  7. There are further reports that Citi has sold almost all saleable business. Its only remaining subsidiary is reported to have billions of dollars of worthless assets.
  8. 2. AIG
    1. Steel bleeding to death. No one now knows its true liability or assets. Even after consuming $ 200 billions of state funds, this Insurer could not insure itself from other losses. It needs re-insurer in the form of Fed and Treasury. Geithner is very kind to this institution.
  9. 3. Bank of America
    1. It is reported on last day of 2009 that the bank is expected to report massive loan losses in 2010 stemming from its aggressive lending in credit cards, mortgages and other business lines. At one point, BofA was offering credit lines of up to $100,000 to startups backed by nothing more than the entrepreneur’s signature. And mortgage requests turned down by the bank as too risky during the credit bubble were eagerly made by Countrywide Financial Corp., which BofA acquired in 2008.
    2. It is reported to have repaid $45 billions of TARP money. What is the source? It is making that much money? No one knows. Who financed them? No one knows.
    3. No one wants to become CEO of this company. Finally, they found one from inside the company.
    4. A recent move by John McCain in the Senate on line similar to Glass Steagall Act in the past will force BofA to sell off Merrill Lynch. No one really knows what is happening in the boardroom of such banks. One day they acquire, use up hundreds of billions of dollars under TARP or some other names, and then in less than 12 months, they will be sold off. What happens to state aids? – “Confuse if you can not convince anyone.”
  1. 4. Fannie Mae/Freddie Mae:
    1. They are acutely distressed. They are not beneficiary of direct state guarantees, but it seems that they are. Between them, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Considering about 20% to 27% default rates, the bad loans may be running into $ 1.1 trillions.
    2. These two companies have already received over $ 110 billions of state aid so far. Call it TARP or otherwise. Instead of approaching Senates for bail out time and again, the Treasury on Thursday gave a blank check to these institutions to sidestep the Senate authority required for bail out. The upper cap of $ 400 billions is now removed. In other words, they can borrow even $ 1 trillion without approaching Senate or Congress. (That makes both stocks good buy. They will never be in trouble).

In other words, the Senate or Congress no longer counts. The President Obama, Ben Bernanke and Timothy Geithner (last two are bureaucrat not appointed by the American people). In short, in world’s largest democracy, two appointed bureaucrat, NOT elected representatives (100 Senators or 500 Congressmen) will rule America and the World Financial System. The whole world will be hostage to this trio – one elected, two appointed.

The other banks like Wells Fargo, JP Morgan Chase, General Electric, General Motors and Airlines are so vulnerable the economy and entire financial system in the United States is pushed down several fathoms deep. The derivatives in Forex trades, oil, gas and precious metals like gold and silver is bulging at alarming rate.

And yet, Dow and Nasdaq are rising to record value. They talk about recession almost comparable to 1930 or 79 years ago, but the Dow is still trading at 10,500+ , about 7500 points higher than in 1987 when the massive crash took place 22 years ago. Free money is ruling the entire world today. Here is something interesting I could pluck out from the internet (these are not my views)

The level of risk the U.S. government is taking on with many of the FHA loans is insane. The U.S. government is taking miniscule down-payments on these mortgages, over 90% of the time less then 4% down payment is out down and with the other hand the U.S government is handing out an $8,000 check, paid for by the U.S taxpayers.

The net effect is that for virtually every new mortgage which these government entities are initiating of $250,000 or less there is zero (net) down-payment. Given that a large majority of current sales in the U.S. are below this level, this means that most of the home-buyers in the U.S. this year are putting up zero down-payments.

The Federal Reserve also allows the banks to “borrow” money at 0%. The banks then “deposit” this money with the Federal Reserve as a “savings account” for which they collect interest, while paying no interest on the “loan”. In other words the Federal Reserve is simply giving the banks free money. But the money doesn’t actually sit there; the Fed uses that money to buy U.S. mortgage bonds to keep the U.S. mortgage rates artificially lower

We are therefore heading towards massive fall. We have never been so close to the death than anytime before. This time around the pain will be much severe than 1930 because the stakes and money supply is almost 50 to 100 times higher. The Gold and Silver derivatives will explode soon. Fannie/Freddie Mae will outperform due to unlimited guarantee from the state.

Would USA Collapse on its own default?  Shouldn’t the World rush to its defense?

The current indications are that US will fail on its own. Its supremacy in practically every field is seriously challenged and will be at stake. Some nations are happy to see the United States fall due to its years of military adventurism, hegemony and arrogance. Its shattered economy will have delayed effects all around the world. After years of supremacy, US is at the receiving end today.

There is a saying that those who are unbeatable abroad are finally defeated on their own turf by their own people. The next war will begin in US itself when the disappointed people try to vent their anger against US administration for not being able to create enough jobs or turn around the economy.

The efforts by US-A so far are totally in wrong direction. If they read my book “Sub Prime Resolved” they will know how to address each problem with convincing solutions. The present problem in USA is lack of demand, not supply. Instead of promoting $ value by paper trading in dollar index, the US-A has to gear up the efforts to jack up physical demand everywhere. That is what makes money and creates jobs.

Should the world remain silent spectator and let the United States flatten before everyone’s eye? I do not think so.

I often hear from many quarters in Asia that “they (Americans) deserve it (collapsing economy and virtual defeat in Iraq and Afghanistan).” May be the actions of recent Presidents were egoistic and smacked of arrogance. But that should not take away all the credits and good will built since the World War II. The whole world became prosperous and democratic only because of United States of America aided actively by Britain.

It was US who saved us from the clutches of Hitler and the tyranny of Japanese imperialism. It was the single biggest contribution to the world. It was again US who saved the world from Communists and Authoritarian regime all around the world, gave the world the computers, internet, free trade, and new inventions. It was US who espoused the cause of democracy everywhere. The surfeit of knowledge that the world finds today owe its origin to United States. We have to be thankful and equally grateful to this wonderful nation. The Knowledge has migrated across the world from the soil of United States.

It is therefore payback time. However, US-A lead by Obama have to be receptive to the newly emerging wealthy countries in Asia. One can not clap with a single hand, says an old adage. When two hands come together, then only we get the sweet sound of clapping.

Instead of encouraging manipulation in the value of dollar by paper trading, US should ask the sovereign funds to invest into US property markets and import wealthy businessmen who can create jobs for the Americans.  To buy the property in USA, they have to necessarily buy the dollar which may enforce real demand. My book “Sub Prime Resolved” precisely addresses to these core issues which continues to be ignored by US-A. Let us hope that the wiser counsel prevails from the beginning of Year 2010.

Kalidas (Anil Selarka)
Hong Kong, 25 Dec, 2009 – Final update on 3 Jan, 2010

Book Web:

May 032009


By Kalidas Ref: 0905-027 of 4-May-2009

So they did it again. The investors applauded. CNBC reported that the financial sector appears to have bottomed out, and the market is up 10% in just under 3 days. The market could not have been wrong. They say the market is ahead of the events by 6 months. If that was so, why did we lend into deepest recession in post-war history. Who remembers that? The people’s memory is like RAM (Random Access Memory) which remains so long is the power up and running. The moment the power is switched off, the memory is gone forever.

It was carefully planned conmen’s game. The crooks are always suggestive so that the target does exactly what is required of them.

Look at the past events, only 2 months back. Note the following:

1.      Citigroup was in dire trouble. The President and Senate were obliged to release $ 45 billions in cash in the form of Preferred Perpetual Shares with 10% coupon. It was Paulson’s brilliant idea. He may have told the President, Senators and American tax payers that they would earn 10% income by way of dividend, in addition to rights to subscribe to Citigroup’s shares under warrants attached.

a.       Everyone believed them. Wow, we are getting 10% return when we are getting only 1% while lending to various banks. Excellent. And we will make money in equity too. What a fantastic idea.

b.      No one asked them how Citi is going to earn when dividend servicing cost of this deal alone will be $ 4.5 billions annually. This is in addition to similar servicing costs payable to other large Middle East investors.

c.       Money was released in the name of TARP. As soon as this purpose was achieved and the money was already in the kitty, these guys allowed a few days to pass. They observed that direct injection of cash was not helping them. The losses will have to be written off in the books of the bank and any money they receive from the Fed or Treasury will straight away go to write off that debit. No money will go to the market by way of lending.

d.      The trio thought that this was a problem. We do not want to write off the amount from the Citigroup’s books. It also needs another does of $ 300 billions. The President and Senate will not simply release more funds if Citi goes on showing more and more losses.

e.       The devil’s mind started working. Target: to get $ 300 billions; Aim: Not to show any losses in the books of Citigroup, otherwise it will be officially bankrupted. What to do?

f.         IDEA – a Great Idea – Paulson appears to have screamed in the sound proof cabin.

i.  Hey, Pandit – you do the following:

1.      We will not give you cash, because it is impossible.

2.      We have given you $ 45 billions. You better give the treasury $ 7 billions of guarantee premium and we (US government) will guarantee your obligations falling due.

3.      Those junk assets when backed by the AAA rating of US government will soar. Those holders can discount those bonds with their bankers because they are backed by the guarantee and full faith of the US government.

4.      Since these bonds have become realizable assets, you do not have to make any provision in your books. Although it is your bad assets, it will not be bad assets any more. They are now fully insured by the US government.

5.      So you will not write off these bad assets in your books. They will now be US government’s troubled babies.

6.      When you get the demand for payment under these bonds, simply redirect them to US government and ask them to pay under the guarantee for which you paid guarantee premium of $ 7 billions.

7.      Pandit: Wow, great. You gave us the brilliant idea; we no longer have to write off any more bad assets. But US government will have to write them off one day in their books.

8.      Paulson : Yeah, one day. By then, you will not be there, I will not be there, and perhaps this Bernie too may not be there.  And who cares?

9.      Pandit: Excellent. But what do I do for $ 45 billions already borrowed. I do not have money to pay even 10% dividend, forget the principal.

10.  Do not worry… Bernanke will take care of it. Hey, Ben, you better convert those PPS (Perpetual Preferred shares) into common equity immediately so that Pandit does not have to bother about the dividend servicing.

11.  DONE. I will take care of that. Said the Bernanke

12.  Now Pandit, since you do not have to make any provision for $ 306 billions and you do not have make any payment of dividend on preference shares, you can write a memo to your staff that you have the best quarter since 2007. Your stock will soar.

13.  Did you buy any? Pandit asked.

14.  I have the right to remain silent, said the other guy.

This is what appears to have happened a day before.

When the Citi lost $ 45 billions and Fed gave them $ 45 billions as capital, following entries could have been passed.

1. Debit     :     $ 45 billions -Cash account (being sum received from the Fed)
2. Credit    :     $ 45 billions -Perpetual Preferred Share Capital (to US government @10% div CPN)

3. Debit     :     Profit & Less Account $ 45 billions (Amount written off)
4. Credit    :     Toxic Assets (Toxic debt assets – also contra of Toxic liability)

5. Debit     :     $45 Billions – Toxic Liability to Customers (could be X? We do not know)
6. Credit    :     $45 billions – Cash withdrawn to make the payment to the creditors

7. Debit     :     $45 Billions – Perpetual Preferred Shares (to US Government) to convert to common.
8. Credit    :     $45 Billions – Common Stocks issued to US government

9. Debit     :     $45 Billions – Common Stocks Issued to US Government (Capital written off)
10 Credit  :     $45 Billions – Profit & Loss Account (Under Item 3)

Final result – TARP fund issued by US government for issue of Perpetual Preferred Shares is finally written off by first converting into Common stock and then by way of reduction of capital of common stock to write off the debits in profit & loss account (now intangible assets)

Under above scenario, the losses are written off in the books of Citigroup because the TARP fund issued for PPS capital were required to be shown in the books of Citigroup. Also note that there was no need to convert Perpetual Preferred Shares into Common Stock in the name of boosting capital of Citigroup because both were Capital – one was Preference shares and other common stock. (Equity). Under the law, both were acceptable form of the capital, ranking subordinated to debt. What was the motive? Here is the possible answer.

While seeking approval of $ 700 billions under Paulson’s Plan, the Senators and President were told that they were going to give the funds to Citigroup with 10% dividend coupon. That is, US government was to earn 10% from Citigroup, that is, $ 4.5 billions per year (on $45 billions lent). By transferring to common stock, the dividend coupon was compromised, and the US government’s priority for preferential treatment of asset distribution in the event of insolvency was also compromised or watered down.

So first, these guys tell the Senators and President that US government or Tax Payers will earn 10% on amount lent to obtain their approval under TARP funds. Then, these guys convert PPS to common stock to forego 10% dividend, and then reduce the Equity capital to write off the debit in the Profit & Loss Account. In short, US government loses $45 billions within 6 months.

Now, see the interesting part for guarantee of $ 306 billions issued by US government for toxic debt held by the Citigroup.  In this case, the guarantee was designed in such a way that the losses are not written off in the books of the Citigroup. As result, the Citigroup would not be showing any losses for next 4 quarters. The losses would be ultimately written off in the books of Federal Reserve as under:

Current Position in the books of Citigroup:

11. Debit   : Toxic debt of $306 billions held by the bank (market value Zero)
12. Credit : Toxic liability of $ 306 billions payable to other creditors (could include X)

The item under 11 will need to be written off to the debit of Profit and Loss account if direct funds were received from US government under TARP.

To avoid the writing off such huge amount in the books of Citigroup, Paulson/Bernanke designed the guarantee route. They showed to US government that Citigroup would give $ 7 billions as guarantee premium to US government for arranging its guarantee. The US government is led to believe that it is just getting the income without letting out actual funds, because the guarantee does not involve movement of funds until it is invoked.

It is like we pay insurance premium to insurance company to obtain their guarantee for insured act. If the insured act materializes into real liability, then only the insurance company would be required to pay.

So these guys Paulson and Bernanke showed “moon” to the US government that they will get a premium income of $ 7 billions without telling them what it was getting into – massive deferred liability of $ 306 billions in near future.

As soon as the Toxic debt is guaranteed, the worthless junk securities are elevated to AAA credit due to the guarantee of  US government.

When the Citigroup faces the claim from creditors for $306 billions,

  1. It will hand over the corresponding toxic debt now guaranteed by US government to the creditors.
  2. It will pass the contra entry in its own books as under:

a.       Debit   : $306 billions Creditors Account in discharge of obligations

b.      Credit  : $306 billions of Toxic debt transferred to the creditors.

c.       In short, the Citigroup balance sheet size is reduced by $ 306 billions (both assets and liability of equal amount are reduced)

  1. The creditors have two options –

a.       either to demand the repayment of the Citigroup’s liability

b.      OR sell the Toxic debt to the market.

  1. When the ultimate market beneficiary of the guaranteed toxic debt needs payment, it will approach the Citigroup for payment. Citigroup, instead of making payment, will direct the claimant to the US government to demand the payment under its guarantee.
  2. In short, Citigroup will no longer need to write off the massive loss of $306 billions from its own book.  There will be no longer losses every month. It will begin to show the profit showing the world that recovery process has started working for Citigroup which is a myth.
  3. The US government when facing the claim of $ 306 billions under the guarantee, will need to write off the amount in Fed’s balance sheet. In short, the debit-able losses of Citigroup will be finally written off in the Fed’s balance sheet, not Citigroup’s balance sheet.
  4. Supposing a top Investment Bank (X) is owed by Citigroup by, say, $ 30 billions. Citigroup will hand over the US government guaranteed debt to X. X has two choices:

a.       To seek the payment of  $30 billions from Fed under its own name. However, it will expose its name for scrutiny later in the event of any enquiry.

b.      To sell the securities of $30 billions  to the market players say, A, B, C, D. These market players will ultimately demand the payment from Fed under their own respective names. Even if there is any enquiry, the name of the penultimate holder, that is, X, will not be disclosed. It can therefore avoid any scrutiny.

c.       The name of X as one of the creditors or counterparty of Citigroup is strongly suspected because the Treasury Secretary Mr. Paulson belonged to that group earlier in highest executive capacity.

d.      In short, Citigroup (and possibly X or its associates) were saved by the above exercise of “US government guarantee of Toxic debt held by Citigroup”. But the final victim would be the US government or American Tax Payers. They were obviously defrauded by the antics of Bernanke, Paulson and Pandit without the knowledge of the Senators, the President of the United States of America. Or American Tax Payers.

e.       When the $306 billions become finally payable, no further approval of Senate or the President would be required because the deal was already approved earlier for guarantee. US government, Senators or the American Tax Payers would not know what had hit them when they have to ooze out $ 306 billions at that time. It may happen 6 to 9 months from now on depending on the maturity profile of guaranteed debt.

It will be observed that good quarterly numbers of Citigroup or JPMC or BOA are not necessarily due to easing of credit crisis or recovery of the economy. These are the acts of window dressing. The balance sheets of most of the large banks are being white washed to look them better and more palatable to the investors. The credit crisis is in fact worsening.

It is therefore not too much to say that the “Citi is saved, the nation is destroyed”. It is a fact.

Kalidas, Hong Kong

4-May-2009 Ref: 0905-027