Friday, March 6, 2009

It’s never too late to change policy, to make a difference, and to turn things around. But it is already very late.

From The Baseline Scenario:

"Whatever Did The CDS Market Mean By That?

with 15 comments

The credit default swap market is a modern Delphic Oracle. It speaks loudly and profoundly - these days at reuglar intervals - albeit using somewhat arcane terminology. And after major statements such as yesterday (or perhaps this week in general), it’s worth pausing to reflect on, and argue about, what it really means.

Thursday’s statement, to me, was about US banks (graph).

The risk of default for US banks, according to this market, is rising back towards levels not seen since mid-October. That is striking enough - but remember what has changed since then: (1) the G7 promised not to let any more systemic banks fail, (2) Treasury has provided repeated recapitalization funds on generous terms, and (3) the Fed offers massive, nontransparent funding to anyone in distress. How can it be that the credit market still or again feels the risk of default rising so sharply and to such high levels?

The most plausible interpretation - and here I’m willing to debate what the Oracle meant exactly - is that people expect the government will force the conversion of junior bank debt into equity. The treatment of private preferred shareholders at Citigroup, last week, is seen as the harbinger of further losses for investors.

In a comprehensive systemic clean-up approach and complete recapitalization approach, debt-equity swaps could potentially play a sensible role, particularly in countries without the fiscal capacity to sustain guarantees of all bank liabilities. But if they are done in chaotic crisis mode - as the government appears to be signalling - the additional damage to confidence around the world will be huge.

The events of mid-September 2008 were traumatic and awful to behold. I saw that trailer and I don’t want to see the movie. But it is exactly into that scary future that we now head.

It’s never too late to change policy, to make a difference, and to turn things around. But it is already very late.

Written by Simon Johnson

March 6, 2009 at 6:20 am"


A big problem is that the economic outlook is looking worse and worse. Here’s a real world case. From Reuters:

“TOKYO (Reuters) - Citigroup plans to sell its 26 percent stake in Japanese online broker Monex Group Inc as part of the struggling U.S. bank’s efforts to raise cash, the Yomiuri newspaper reported on Friday.

Shares in Monex, Japan’s second-largest online brokerage in terms of customer accounts, fell 8 percent on the report, cutting the value of Citigroup’s stake to 14.1 billion yen ($144 million).

Citigroup, which has received $45 billion of U.S. taxpayer funded capital injections since October, appears to have already sounded out several financial institutions on the Monex stake, the Yomiuri reported.

Yoshito Shimoyama, a spokesman at Nikko Citi Holdings Inc, Citigroup’s holding company in Japan, declined to comment.

Citigroup is also trying to sell Nikko Cordial, a bricks-and-mortar retail broker with 109 branches across Japan.

Japan’s top three banks — Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group Inc — have shown an interest in buying Nikko Cordial, sources have told Reuters.

The three banks may also jump at the chance to buy a stake in Monex, but would likely make it a first step toward seeking majority control, said Azuma Ohno, a brokerage industry analyst at Credit Suisse Securities.

Mitsubishi UFJ owns a 51 percent stake in Securities Co, the fifth-largest among Japan’s six major online brokers.

“If it thinks Monex is cheap ( NB DON ), it might be interested in buying to expand its current operations,” Ohno said.

Neither Sumitomo Mitsui nor Mizuho have an online brokerage unit, and buying a stake in Monex would allow them to make a full-fledged entry into the market.

But the potential sale of the Monex stake comes as Japan’s online brokers struggle to maintain profitability ( NB DON ) with the benchmark Nikkei average hovering near a 26-year low.”

So, in essence, Monex, Banamex, etc., are going to bring in less money now if they are sold, and that seems to be the case for the near future. It might also be the case for a longer future, meaning that the money paid to save Citi will grow and never be recovered. Citi needs to sell some assets.

By the way, notice that they could sell these assets cheaply instead of borrowing so much, but they don’t want to do it. That probably makes sense for Citi, but taxpayers should be aware of that.

Also, since Citi is a holding company, as we’re constantly being told, don’t these holdings like Monex and Banamex run themselves? What was so impossibly difficult about taking over Citi? Are they running the day to day operations of these holdings?

I’m just asking.

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