Citigroup Under $1 ... Credit Suisse: Where All The Money Went

From TheDailyBell.com - Issue 221 • Friday, March 06, 2009


"Our power placed us above the rest." - Winston Churchill


Citigroup stock below $1 as investor faith erodes


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Citigroup Inc., once the world's biggest bank by market value, dropped below $1 in New York trading for the first time as investors lose confidence the shares can recover after more than $37.5 billion in losses and a government rescue. Citigroup fell to $1.03 at 12:32 p.m. on the New York Stock Exchange after reaching 97 cents earlier today, marking an 85 percent decline this year and giving the New York-based company a market value of $5.5 billion. At its peak in late 2006, Citigroup stock was worth $55.70, for a market value of $277.2 billion. Citigroup, run by Chief Executive Officer Vikram Pandit, is now the 184th biggest bank by market value, behind Malaysia's Bumiputra-Commerce Holdings Bhd and Turkey's Akbank TAS, in which Citigroup owns a 20 percent stake, according to data compiled by Bloomberg. "You can finally buy Citigroup shares at the dollar store," said Diane Garnick, who helps oversee $354 billion as an investment strategist at Invesco Ltd. in New York. "The banking industry is about to enter the era of entrepreneurship as the umbrella model fails and companies will position themselves to focus on one niche. - Bloomberg

Dominant Social Theme: A historic collapse. Who would ever have suspected?

Free-Market Analysis: Citigroup Inc. is a penny stock now. We are well aware of the special contempt that American regulators hold for penny stocks. We've heard it in their voices. But Citigroup is worse than a penny stock, because penny stocks in the United States are stocks that trade at less than US$5. Citigroup went under a dollar on Thursday. It is a dollar-penny-stock. Yet for some reason, however, the vituperation aimed at the ordinary penny stock seems to be missing as regards Citigroup. People seem more puzzled and frightened than anything. They just can't figure it out. How did Citigroup go from a market valuation of US$300 billion to US$5 billion? "Mabel, did you see this! Crazy times, Mabel. Crazy times!"

But as we pointed out in the other article in this edition of the Bell, what has happened is not crazy at all. Citigroup was at the very heart of the longest long-term fiat money bubble in the United States (some 30 years, we figure). It was the engine of that bubble, with hundreds of thousands of employees and trillions of dollars in loans and investments and derivatives. Lord knows what kind of wreckage remains on its books now. In fact, that's probably one of the reasons for the current share price. The market knows what it doesn't know - and the market is stating loudly and clearly that it doesn't know much about the real nature of this behemoth bank. What it does know it doesn't like.

How much of Citigroup's business is wrapped up in failed developments and ruined houses? How much of its capital is tied up in loans to ventures that are now seen as impractical and useless? That is the reason for Citigroup's valuation. The market realized about a year ago the nature and extent of this biggest of bubbles and it has been pricing in the ruin of it all ever since. And Citigroup is ruined. In fact, absent the government's endless injections of billions, the bank would be in pieces by now. It would not exist. Its businesses would have been cut up by now and purchased. The real value would have been known. The worst, in fact, would have been over. But that is not going to happen. Citigroup is deemed too big to fail.

Conclusion: It is indeed puzzling to see the fluctuating value of marketplaces and major financial players. Bank of America and even venerable Wells Fargo are plunging toward the penny stock range (BOA is already there.) Of course, people don't get it. Capitalism has failed, they say. Maybe there is something to socialism after all. What they don't understand unfortunately is that central banking IS socialism. It is pure socialism - a bunch of insiders determining basic money prices for the entire world. What has failed, in fact, is socialism - and its apostles (Citigroup) have failed as well. Unfortunately, its enablers remain to confuse us and to confound the general population. Even now they are working hard to rebuild the failed system using "stimulation" to prop it up under the justification that its most useless excrescences are simply too important to dissolve. But Mabel, these are not crazy times. Sadly, they are all too predictable.

Credit Suisse defaults - where all the money went


AFP/Getty Images

To Jean-Pierre Boespflug, French-born developer of a ski resort in the Idaho outback, the $250 million loan from Credit Suisse Group AG was too good to pass up. Dealmakers from the Swiss bank's Los Angeles office arrived to pitch Boespflug on the unorthodox loan in 2006, just when his Tamarack Resort was lining up financing for its base village beneath newly cut ski trails. Unlike regular construction loans, which dole out enough money to complete one project at a time, this one would let him build several clusters of homes and condominiums at the resort simultaneously. The loan would cover just a portion of the development cost. The idea was that proceeds from selling units in one building would be used to finish the next, and so on. As long as the homes and condos sold, Boespflug would be fine. "It was like putting candy in front of a 4-year-old," Boespflug, 54, says. "It looked like a dream." Boespflug signed the documents in May 2006. Credit Suisse collected its fee and sold the loan to a syndicate of investors it had lined up. Mutual funds run by Morgan Stanley's Van Kampen Funds Inc. unit bought the loan when it was made, or shortly after, according to regulatory filings. Then the real estate market went south, and sales at Tamarack slowed. In December 2007, just 19 months after taking the Credit Suisse loan, Boespflug missed a $5 million payment. Tamarack is one of at least eight high-end projects in the U.S. West, Florida and the Caribbean financed by Zurich-based Credit Suisse that are either in default or in bankruptcy." - Bloomberg

Dominant Social Theme: Bad timing. What are you gonna do?

Free-Market Analysis: Where, oh where, did the money go? We've written before about it. We think it is an important issue because explanations by the mainstream media about how markets can shrivel quickly by thousands of points often end with "the money just went away."

But, no, it didn't. This is very important for people to understand. (Surely our readers do already.) It is a subterfuge to say the money "just disappeared" because it short-circuits an explanation of how fiat money really works.

Fiat money is money divorced from an underlying asset. Dig up gold and link it to paper money and the money has value because it then represents the time and effort it took to bring the gold to the surface. De-link money from an asset and it literally has little or no value. That's why fiat money can sink close to zero. Over time, fiat cannot sustain its value. Honest money can.

Just as importantly, fiat money causes gigantic bubbles. These bubbles trap value and the value once locked up cannot be unlocked if the bubble bursts. How does it work? The Credit Suisse example is a good one for several reasons.

First of all, the Bloomberg article, excerpted above, shows clearly how value is locked up in speculative ventures. These ventures would likely not have been undertaken in a less speculative atmosphere. But they were undertaken in the middle of a raging fiat-money mortgage bubble. And once the funding was obtained, the construction began. Sales were made and some of the units sold. But not all. And now many of the units are unfinished and merely secured against the weather. That means the whole development will eventually be worth little to nothing - apparently it already is. Scratch another US$250 million.

But the damage doesn't stop there. There is a whole procession of support personnel that put in time and effort on a project that is ultimately valueless. There is a financial chain as well and a legal chain. All of the financing and the legal work is basically rendered worthless by the failure of the development.

Second, the article tells us something about what happened to the Swiss. Much of the Swiss banking establishment consists of private banking. But two of the biggest Swiss firms strayed from the private banking model, and now have paid the price. UBS and Credit Suisse have virtually imploded, especially UBS. The Swiss have learned again that private banking, emphasizing discretion and honest money, is the better model. But what is both ironic and unfortunate is that the model adopted by Credit Suisse and UBS is the one pursued by most banks in the Western World. The Swiss will likely recover because they have an older model to revert to, but what of the rest of the West?

The rest of West is saddled with the kind of imploding developments and banks that mimic the Credit Suisse experience. Multiply the Credit Suisse debacle (in the area of US$3 billion) by hundreds, thousands, or tens of thousands of such investments and you get an idea of where the money went.
Yes, fiat money apologists will want to explain market reactions any one of a number of ways: "the money went away" and "markets are irrational." This is wonderful for proponents of fiat money because most such are regulatory minded anyway. They want the free-market conversation to feature disappearing currency and crazy speculation. Then they can bring on some more ineffective regulation. It is not the regulation these critics are after but the control. Many proponents of the "disappearing money" theory cluster in and around government.

But markets are NOT irrational. Markets adjust based on the information available. And fiat-money is the biggest fooler and faker of honest markets. Fiat money and the central banks that offer it create tempting scenarios that melt away like mist. Fiat money creates mountains of hardware and software that sits rotting in the desert after the "tech bubble" collapse. Fiat money creates millions of dilapidated developments and ruined houses that rot in the sun after a "mortgage bubble" collapse.

People don't appreciate the aftermath of a bubble because they don't travel around the world to see the results. If they did, they would be appalled by the waste and ruin. And yet it is so seductive that even the Swiss need to relearn the lessons of their forefathers. As do the Chinese who apparently banned fiat money in the 1800s but are now in the grip of another great fiat money inflation - one that will end for them in tears just as it has in the West. Here is some more from the Bloomberg article we excerpted above:

Failures reverberate in the financial system because Credit Suisse sold loans to investors who, in turn, put them into mutual funds or packaged them into securities called collateralized-loan obligations. ... Real estate and anything associated with it looked good to just about everyone in 2006. Credit Suisse earned fees making loans, investors earned high yields on the CLOs and project developers got financing. Some even got cash back. Now, the only profits from Credit Suisse's more than $3 billion in resort loans are going to bankruptcy lawyers.

Conclusion: The explanation above is not the only reason for the disappearance of money. As bubbles deflate, stock money finds its way to the sidelines or gets poured into precious metals and bonds. But a lot is trapped in useless, failed investments. The waste inherent in fiat money is beyond calculation. The heartache of mal-investments is all too real. People plan their lives and retirements around bubble economies only to find out too late it was all a dream. There likely won't be a V-shaped recovery this time. The Dow touched down around 6,550 on Thursday, and that's a long ways from its recent 14,000 top. The Dow has lost more than 50% of its value. How much is that? US$5 trillion. US$10? Ah, the blimp is burning. Oh, the humanity!


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