Another $US265bn of write-offs will make a lot of banks around the world insolvent.
To put it in context, this report is from 27 Nov 2007:-
Wall Street rallied on Tuesday, primarily the result of the announcement by Citigroup that it is selling up to 4.9 percent of itself for $7.5 billion to the Gulf Arab emirate of Abu Dhabi, giving the nation’s largest bank fresh capital as it wrestles with the subprime mortgage crisis and a search for a new chief executive.
The capital injection will shore up Citigroup’s balance sheet, which has been hurt by some $6.8 billion of write-downs and losses in the third quarter and the potential for another $11 billion in the fourth quarter.
The bank is paying what many believe to be a high price for the capital injection because the mandatory convertibles it is selling to Abu Dhabi have a fixed coupon of 11 percent, a number that is above the average 9.4 percent yield on junk bonds. Actually, the rate is reasonable when you take into account the dividend yield being paid, the fact that mandatory convertibles have a higher risk and the implicit cost to Abu Dhabi as a result of tying up capital in Citigroup as opposed to other possibly more lucrative investments.
Furthermore, under the terms of the deal, when the debt is converted into equity, the conversion will take place at a share price at least 6.8 percent higher than their value on Monday. That is one side of the coin.
The other side is that Citigroup's decision to raise $7.5 billion in additional capital is a possible indicator that the bank is likely to have a rough fourth quarter, possibly worse than expected.
Citigroup is in a difficult position. Its tier-one capital ratio, a measure to assess bank soundness, was 7.3 percent at the end of the third quarter, below the bank's target of 7.5 percent.
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