hmmm...somethings up, page-22

Guys, I don't know but these may have something to do with it. In todays MIDAS from Le Met:

Something insidious is lurking beneath the surface of the FNM/FRE agency bond market. The spread had blown out to 164 on 10-yr paper by the end of the day on Tuesday. With the Governmnet "explicit" guarantee of FNM/FRE in place, agency paper should be trading, at most, 5-10 basis points behind the equivalent maturity Treasury. The idea that there is a large of supply of agency paper saturating the market because foreign central banks are selling does not explain this spread. This is so because large hedge funds with cash, like a Soros or SAC Capital, would be arbitraging this spread in the 10-yr maturity range by buying up 10-yr agencies and selling Treasuries. This should be a true riskless arbitrage opportunity. They would do this all day long and could use plenty of leverage because is an example of a "spread" trade that a bank would be happy to finance because it's theoretically riskless. The key descriptive is "theore tically" and therein lies the problem. There is something about the U.S. Treasury's explicit guarantee of FNM/FRE that the market isn't buying. If anyone has any ideas/thoughts, I would love to hear it, because I'm baffled.


Concerns about commercial real-estate are exacerbating the problems in the credit markets. Note that Credit Suisse recently warned that two big commercial mortgages that had been packaged into securities in the past year are likely to default. In addition, Fitch reported that delinquencies of US commercial mortgage-backed securities edged up to 0.51% last month from 0.45% in September, while noting that "with CMBS issuance at a standstill and portfolio lenders cautiously managing their balance sheets, borrowers are facing increased difficulty accessing capital to refinance maturing loans". The spread on the CMBX AAA index is up another 65 bp to 635 bp today, having surged nearly 500 bp since late September.


Dave from Denver on Citi...

Mr. Pandit, "send not to know for whom the bell tolls. It tolls for thee."

Citicorp has a $2 trillion balance sheet - twice the size of AIG's, or the same size roughly as AIG and Goldman combined. Why do I use the AIG/GS analogy? Because we can assume Citi's assets are of kind and quality as both AIG and GS. I took a look at Citi's latest quarterly filing and the disclosure stinks. But let's generously say that Citi needs to take down the value of its assets, generically, by 20% and be generous and not include off-balance-sheet items in that mark-down. Rest assured Citi has plenty off-balance-sheet of what destroyed AIG and Wamu and Lehman and Bear and Wachovia...

If you generically reduce the value of Citi's stated balance sheet by 20%, that would shear $400 billion off vs. Citi's stated book value of $126 billion. Did they teach Vik Pandit how to spell "i-n-s-o-l-v-e-n-t" at his University?

Citi paid $800 million for Pandit's old hedge fund, Pandit made $165 million on the sale, and they closed down that hedge fund June, just 11 months after Pandit flipped into Citi. Can someone please have their Congressman investigate Pandit and Citi on this transaction? Citi also announced the closing of another hedge fund it runs and it has roughly $800 million in debt that Citi will be liable for AND they are absorbing another $17 billion in off-balance-sheet SIV assets that are no doubt worthless.

I think my estimate of Citi's insolvency looks very generous indeed.