Friday, November 2, 2007

About That Citigroup Writedown and the Financials

Citigroup (NYSE:C - News) may have to cut its dividend to lift its capital levels, said CIBC World Markets. Morgan Stanley and Credit Suisse also downgraded the financial giant.


Stocks dived on the day's news. The Nasdaq fell 2.2%, while the S&P 500 and Dow slid 2.6%. The small-cap S&P 600 plunged 4.1%.

Banks led the way, with the SPDR financial ETF crashing 5%. Citigroup fell 7% to a 41/2-year low.

Credit Suisse (NYSE:CS - News) fell 5% after saying third-quarter profit fell 31%. It wrote down $1.9 billion in mortgage and leveraged loan losses.

Bond and mortgage insurers such as MBIA (NYSE:MBI - News) and Ambac (NYSE:ABK - News) dived on worries that subprime defaults will keep soaring. Insurance giant AIG (NYSE:AIG - News) fell 6% to a 52-week closing low.

The 10-year Treasury yield fell 11 basis points to 4.36%.

But it's not just problems at Citigroup:

After August's turmoil, credit markets had generally stabilized, and stock investors had begun to act as if the problems were over, driving stocks into record territory again. But beginning last week, with the $8.4 billion write-down by Merrill Lynch & Co., a drumbeat of bad news began to send a different message.

Merrill's write-down, which was larger than expected and led to the departure of its chief executive, was significant in that it included fresh financial information from September. All of the other major Wall Street firms ended their quarters in August, so investors interpreted Merrill's news as a sign that markets had soured that month.

Swiss bank UBS AG followed with a warning on Monday
that the fourth quarter was likely to be weaker than it had projected. Bad news from mortgage and bond insurer Radian Group Inc. and from lender GMAC, which yesterday reported large third-quarter losses, added to worries that problems would persist at least through the end of the year.

First, I have to add that I love the irony of an analyst at one financial company downgrading another financial company for problems that are industry wide. That scenario is just, well, really funny.

But..on to more serious problems. All of the action quoted above (financials down, Treasuries up) indicates that investors are nervous about the financial implications of credit market problems. Basically we are returning to the central problem of credit derivatives: there are a ton of them out there and we have no idea what they are worth. Compounding that problem is that financial stocks comprise about 20% of the S&P 500. So -- the largest market segment has a huge balance sheet issue that won't be resolved for some time. That's the type of uncertainty that traders hate.

Right now photobucket is down for routine maintenance. I'll post charts when it's back up and running. Also, I'm traveling again today so I'll be posting from airports throughout the eastern and central US.)