Bill Cara’s Blog for February 16, 2010 [See post-close report]

Citigroup's plan: profit from the next crisis

By David Weidner
Feb 16, 2010 02:55:00 (ET)
NEW YORK (MarketWatch) -- Questions of the day: Would you buy a round-trip ticket on an airplane prone to crashes? How about a car with a history of serious brake problems? Interested in a TV that works great, except for the picture?
If you answered yes to any of those, do I have an investment opportunity for you.
Citigroup Inc. (C, Trade ), our taxpayer-funded national bank, is readying a new credit derivative, the CLX. Basically, the CLX is systemic risk insurance that will pay out in the event of a financial crisis. The basic premise is to allow investors to hedge against a spike in funding costs.
According to Risk Magazine "the CLX is constructed as a sum of the Sharpe ratio -- deviations from the mean divided by volatility -- of various market factors, such as equity volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly recomputation from lengthy time series." Read Risk Magazine story on the CLX.
If you understood the last paragraph, please take two bailouts, a bonus and call your Treasury Secretary in the morning.
Citigroup says CLX is based on six indexes. It's still in the planning stages, but it won't put the firm at risk. Citi's considering building it at the request of customers it considers sophisticated enough to use CLX wisely. Citi just wants to make a market in CLX. It will buy when there are no buyers, sell when there are no sellers. Citi says its role will be neutral. They may even bring other brokerages in to spread the risk.
Sorry, but the CLX sounds a lot like what got Wall Street into trouble in the first place. Complicated derivatives, including collateralized debt obligations, synthetic CDOs and credit default swaps, ripped apart balance sheets and drove financial institutions such as Citigroup into the arms of taxpayers.
Investors, swayed by Wall Street sales pitches touting the safety of these securities, had little understanding of the risks these securities held. And who can blame them? When you look at the CLX, it's not exactly clear on what it's based and who's really carrying the risk.
But the complexity is only part of the problem.
Barry Ritholtz, the well known blogger and investor, points out on his Big Picture blog that "Any insurance product, CDS, any contract is only as a good as the financial condition of the contraparties. Any insurance product designed to pay off in the event of a financial crisis becomes increasingly unlikely to do just that...We already have systemic risk insurance. Only, it's not from Citi, it's from Uncle Sam." See blog post by Ritholtz.
The point is, when push comes to shove, will there be a market for the CLX? Won't most of the institutions buying them be in trouble if they need to cash out? And who cashes them out, Citi? How much is Citi going to set aside to cover potential losses?
Citigroup, denies that it's putting taxpayers at risk. Rather, it might have the opposite effect: for example strengthening an insurer when borrowing costs soar.
But a lot of finance pros have looked at this and they say the way CLX is laid out, there doesn't seem to be any specific party responsible for paying on the contracts. If it's Citi, what happens if Citi can't pay? Under proposed reforms, Citi would be too big to fail and get a bailout if it ran into CLX trouble.
You, dear taxpayer, may be the ultimate counterparty to this "innovation."
CLX raises a lot of questions, but let's add one more. Where are the regulators?
For months, we've been hearing how there's been a regulatory crackdown on Wall Street. Agents from the Securities and Exchange Commission, the Commodities Futures Trading Commission and Federal Reserve allegedly are swarming institutions such as Citigroup. They're pushing banks to build up capital, reduce leverage and cut the risk-taking.
Testifying before the Financial Inquiry Commission, Lloyd Blankfein, chief executive of Goldman Sachs Group Inc. (GS, Trade ), told lawmakers that his firm was under more scrutiny than ever, especially from the Fed.
More regulation was the tradeoff made in the fall of 2008 when the Fed offered cheap money and protection to institutions such as Goldman and Morgan Stanley (MS, Trade ) by giving them a banking charter.
Citigroup CEO Vikram Pandit reportedly nearly lost his job because of one dissatisfied regulator, Sheila Bair, the chairman of the Federal Deposit Insurance Corp. She might want to revisit the subject, given how CLX could impact the bank's $303 billion in U.S. deposits. Read WSJ report on Bair and Citigroup.
Citi says regulators have been given CLX for consideration. So far, they haven't passed judgment.
Financial innovation by its nature isn't a bad thing, nor is hedging. But securities built to be dependent on so many factors for them to work are too risky by nature. When taxpayers are the ultimate backstop, regulators should step in.
They're supposed to be our insurance against future bailouts.

Good morning.

TGT - Upgraded to Buy @ UBS

Frankly, I'm more in favor of the William Wallace treatment in Braveheart.

Hope you're able to cash in more than props!

10 day ATR is 51 cents, now trading down 68 cents pre open. Low of premarket is 13.40.

Sticking in a bid @ 13.34. Cancel if not executed by 10 AM EST.

Do your own homework, GL.

update: long @ 13.38, changed my limit order.

Latest pensée from Eamonn Butler of the Adam Smith Institute, this one about the Toyota debacle: 'Apparently the problem is that the accelerator sticks on and the brakes don't work. On those grounds, we should have recalled the British government long ago.

I am actually neutral. Mostly cash. and I think the major trend is down. I went into the weekend cash.

Built some short positions this am. If it was smart to buy the dips in 2009, i am thinking it may be short the mini rallys. Or anytime news says "Greece is a-ok"

3pm price was 49.16, 5% of 10 day ATR is .275, buy stop limit 49.44/49.44.

FD: long SWM

added to position which I probably shouldn't have and I should have waited till 3PM to put the buy stop order on. average cost 47.25.

China produces 82% of what it needs... worldwide, the Cost of copper production is $ 1.00 per pound... but, just like Oil, its a scam, pushed up by the big money, once again screwing the average folk..

I decided to hold my puts after it broke out above 1,085 because I double checked the 20 DMA and noticed that the revised 20 DM average for SPY will be around 109.1 after today's action, which is exactly where the upside was capped so far this morning. I have noticed in prior corrections off big moves where the averages broke down through the 50DMA, the averages first bounced up to the 20 DMA and then dropped again. I think it's possible for the same thing to happen here.

If you're looking to go short, here is a good if-then set up:

Short here and if the SPY goes above 109.30 or so, then close out your short/puts. Just remember to build in enough capacity for losses to not kill you and to keep your emotions out of the trade.

If we get there this week.

Bought some at $28.06 on the announcement just a few minutes ago from Obama regarding nuclear...

Added to this position at $28.06 and now hold a pretty big position in this stock relative to my account sizes.

Lelik - It sounds like he's maintaining his bearish point of view that he has held (wrongly or early???) throughout the markets' rebound. If that point of view comes to fruition then I agree with him. The fear associated with a shrinking economy and falling markets caused by excessive deleveraging will simultaneously cause demand for Treasurys to rise.

long @ 8.75. Had an existing buy limit order in, not the best risk/reward ratio. Feb max pain was 12, now 10. Sell limit 10.70, the 50 day EMA.

Sell stop @ 7.75.

Do your own homework.

http://chart.ly/pdmywt

Baz - did you buy any CAGC? I've been watching that, CGA, FEED, YONG, and SEED for months now...CAGC is the strongest of the bunch.

feed has outrageous short interest... entered last Wed..

This is a recent video of Hugh Hendry and Nassim Taleb taking up Mark Faber's challenge in the Russia Forum on where to invest $100,000.00 in 2010. Two different views on U.S. Treasuries:

http://tinyurl.com/ygv9pc7

Gold priced in euros is making a new high today. I wonder, does that mean that buyers in euro-land are the ones driving POG higher at this point?

capitulation play (RSI 7 day below 10). Buy stop 17.05, nickel is 5% of the 10 day ATR, added to 3pm price 17.05. See if the big boys wanna play. 22.5 is Feb max pain so the trade will be quite short in duration.

Do your own homework.

Update: if it doesn't execute by the close, I'll be switching back to the spy/LHB trade for tomorrow's open.

sold half of position for 11% gain. Expect to let rest go in the AM. Long 2/8 at 62.25

Do your own homework.

Update: ah, heck with it. out at 69.81.

dave - it doesn't say anything about "who" is buying. We are all free to hold euros should we please - not just those in euro-land. Today its a new high in terms of the euro, tomorrow it may make a high in some other fiat currency.

10 day ATR for SPX is 17.95 so the close + the 10 day ATR is a potential target.

Options max pain for SPY is 110.

The 50 DEMA is 1097.32

Hourly MACD for SPY does not show a divergence...yet.

Guess we'll see.

Arizona McD hiring 500 employees with benefits. Now is your chance at the American Dream and lower our countries unemployment rate.

http://bit.ly/aJjeKC

Unlike you, Kaimu,

The average dull eyed American up to the gills in debt has no idea whatsoever a billion or a trillion means. Unfortunately that includes a lot of our congressfolks. So who notices? Will more JP Morgan offices be targeted by the angry undercurrent of econ-terrorists out there exacting a price on our behalf?

The mind boggles.

Hiring part time help at Mickey Dee's makes the US boldface headlines.
As soon as Reuters and the Wall Street Journal proclaim the recession is over on their front pages tomorrow, Obama will hit CNBC with one of his speeches proclaiming unemployment is officially under 10% while his stimulus plan has worked.
Working 20 hours a week for minimum wage, or 7,500.00 a year, would definitely qualify a guest worker for Federally funded medical insurance, Federally funded dental insurance, and State funded food stamps. "You may become eligible for insurance," is another credit default swap for "taxpayers will be paying the insurance premiums for guest workers."

inflated debt of Greece. The silence may not be the friend for Goldman this time.

Banks that inflated Greek debt should be investigated, EU urges

European parliament calls for investigation of Goldman Sachs and other investment banks that had contracts with Greece

The European parliament has urged EU authorities to investigate the role of Goldman Sachs and other investment banks in contracts that helped inflate Greece's public debt.
Over the past few years, Goldman Sachs and other banks lent money to Greece through currency contracts that allowed the government to raise millions but that didn't count as debt. The transactions led to hefty fees for the investment banks.
"It appears that Goldman Sachs have colluded with past Greek governments to reduce the appearance of Greece's debt for short-term gain, while in reality making it worse than ever," said Arlene McCarthy, vice-president of the European parliament's economic and monetary affairs committee. "These deals have increased costs for Greek taxpayers and left a mess behind for Greece's citizens and the eurozone."
McCarthy urged the EU's economic and monetary affairs commissioner, Olli Rehn, to explain the banks' role and to specify what action he plans to take "to stop banks assisting European governments in hiding public debt".
The deals, which started around 2001, only had a small effect on the country's budget deficit and its future liabilities, a former top official who was involved in the matter told Reuters.
"These instruments were not invented by Greece, nor did investment banks discover them just for Greece," said Christophoros Sardelis, who was chief of Greece's debt management agency when the contracts were conducted with Goldman Sachs.Such contracts were also used by other European countries until Eurostat, the EU's statistic agency, stopped accepting them later in the decade. Eurostat has also asked Athens to clarify the contracts.
Goldman Sachs declined to comment.
Greece's credibility in the financial markets has plunged on concerns about the reliability of its economic data. The country is now under pressure to cut its budget deficit to 3% of the size of its economy by 2013 – down from 12.2%. Greece's public debt is forecast to reach 125% of gross domestic product this year.
Concerns about Greece's ability to pay its debts have spread to other Southern European countries, such as Portugal, Italy and Spain. Defying market turbulence, the latter plans to issue 15-year bonds this month, a challenge to an investment community that has punished high deficit countries since the beginning of the Greek crisis two weeks ago.
"I don't think this (Spain's) auction should be any issue, especially after EU leaders said last week that for the foreseeable future, default is not an option," said Cyril Beuzit, head of interest rate strategy at BNP Paribas.
The premium that the Spanish, Italian and Portuguese governments pay over the rock-solid German bunds to raise funds has stabilised over the past few days. In Spain's case, this spread trades now at about 80 basis points, down from the 100bps reached last week, but still ahead of the 50bps paid before the crisis broke.
The real test to the market will come when Greece tries to sell 10-year bonds in March, Beuzit said.

http://www.guardian.co.uk/business/2010/feb/16/gre...

lets watch the last shreds of credibility of sovereign states disintegrating when they revert to blaming banks for predatory practices and their ineptitude and rampant over spending for their nation's woes.

how can anyone have faith in their own nation when they resort to blaming SIV's for their ills?

greece has been on the burner for over a decade, these problems were talked about 10 years ago when such topics were out of fashion and believed by many solvable by a popping stock market.

blame anyone but themselves.. such indignation will be the downfall of the one mighty empire.

"The loan guarantees were authorized by the Energy Policy Act of 2005. If the reactors are built and operate profitably, the borrowers will repay the banks and pay a fee to the federal government in exchange for the guarantee; if the borrowers default, the federal government will repay the banks. Critics have argued that the chance of default is high, and the loans have been delayed by protracted negotiations over what the fee should be."

NYT: www.nytimes.com/2010/02/17/business/energy-environ...

An interesting examination of Chinese astrology was written some 35 years ago by an Englishman. The title was "The Year Of The Tiger." The author was Claude Balls. I'm waiting for "The Year Of King Rat" by God's servant Sir Blankfein.

I suppose it is good drama but 'Shirtsleeves to shirtsleeves in three generations' is no doubt true. Look up the Forbes 100 richest for each decade for the last 50 years. It's like the Dow. Kick out the old, bring in the new. I still wonder whatever happened to the heirs of the CEO of American Ice?

Which brings up an interesting question about buy and hold. Who still owns the shares of American Ice and a host of other once 'blue chips.' I suppose they all went to shareholder heaven.

A vignette from the conglomerate 70's. If I remember corectly, ITT was a high flier. They had convertable preferreds that went to the letter K. Stupid CEO's, Banksters and the gullible investment public have been around since Cleomenes wheat monopoly. Be careful out there. Hoard your chickens and protect your family.

Never fear Kaimu, there's more calamity to come. America appears to like doing it the hard way:

http://krugman.blogs.nytimes.com/2010/02/16/enemie...

http://www.telegraph.co.uk/news/worldnews/northame...

Hey, maybe Palin gets the presidency for good measure.

ALOHA!!

Les ... Its clear what America does not need is more DEMOPUBLICANS ...

No debate in Congress over the largest $1.9TRIL increase in the US Public Debt ceiling by either party! What does that tell you about both parties concern over debt? Both parties have greased the debt wheels ready to spend another $1.9TRIL ASAP! It is obvious someone over at the CBO knows some hefty bailouts cometh!

ALOHA !!

I Googled "union" and got these definitions ...

1 - an organization of employees formed to bargain with the employer; "you have to join the union in order to get a job"

2 - the state of being joined or united or linked; "there is strength in union"

3 - of trade unions; "the union movement"; "union negotiations"; "a union-shop clause in the contract"

4 - A democratic worker organization that enables employees to join together with one another in order to negotiate compensation, benefits, working conditions, and other terms of employment with their employer. Unions ensure that employers are 1) fair, 2) accountable and 3) responsive to employee concerns. Unions establish a process by which to deal with workplace issues and ensure that said process is applied evenly to employees.

5 - an association that uses thuggery, hooliganism, bribery and blackmail to get the wage level raised above its true value for lazy workers.

6 - 1) Workers unite to fight the man; the man is so damn powerful individuals have no chance, but if we all stick together, maybe we've got a chance to earn a decent wage. 2)The same organization gets people "taken off the schedule" because they won't give up 20% of their paycheck.

7 - a political unit formed from previously independent people or organizations; "the Soviet Union".

So we have numerous ways to look at a "union" ...

None of the above definitions of "union" ever mentions the word "competition", because once a union is formed then competition ceases to exist. This is the flaw that you can now apply to the other "union" in the financial news these days ... the EU-European Union.

From: The Bailout Of Greece and the end of the Euro, by Philipp Bagus
Feb 11, 2010

Today the question is, will Greece be bailed out by the rest of the countries? The officials of the weaker countries tend to emphasize the solidarity of the union, while the stronger countries make it clear that there will be no bailout.

Yet, the whole debate is misleading: Greece is already being bailed out by the rest of the union. The European Central Bank (ECB) accepts Greek government bonds as collateral for their lending operations.[1] European banks may buy Greek government bonds (now paying a premium in comparison to German bonds of more than 3%) and use these bonds to get a loan from the ECB at 1% interest — a highly profitable deal.

"The future of the euro is dark because there are such strong incentives for reckless fiscal behavior, not only for Greece but also for other countries."

The banks buy the Greek bonds because they know that the ECB will accept these bonds as collateral for new loans. As the interest rate paid to the ECB is lower than the interest received from Greece, there is a demand for these Greek bonds. Without the acceptance of Greek bonds by the ECB as collateral for its loans, Greece would have to pay much higher interest rates than it does now. Greece is, therefore, already being bailed out.END

LINK: http://mises.org/daily/4091

So here we have a union, a monetary union, where "competition" has been eliminated like it is in every union. Unions are only as strong as its weakest link. Unions subsidize poor performance. If ever I learned that lesson as a union shop it was when I hired IBEW workers. There is no incentive for competition and the poorest performing worker was equal to the best performing worker as the worst worker was paid the same as the best worker, hence the best worker was under no incentive to stay the best just as the worst worker had no incentive to be the best. From that aspect the EU is no different. When all bonds in the EU are equal there is no incentive to perform, competition is eliminated, which translates to spiraling trade deficits and fiscal mismanagement for the weakest links.

A union is a union ...

There is only one other entity worse than a union where competition is non-existent ... a MONOPOLY! The end results are the same though.

A union is a union ...

There have been times when union (as in United States) was a defense against tyranny imposed by the strong. My paternal grandfather, a farmer in Sweden, had no money to buy land when he arrived in the US in the late 1890s and became a coal miner.

The hours were long, dangerous, cold and wet. His clothes were frozen stiff after the walk home each winter. Yet, even though they were paid pennies per ton dug each day, this was one of the higher paying jobs for immigrants.

The union arrived too late to benefit him in any way and he died young, but eventually better conditions were won through that unity.

In my lifetime unions grew to be the "strong" imposers, and management usually agreed to their demands to avoid personal cost to their profits a strike would bring.

After a steady decline in membership and influence they have been revived by Obama in his willingness to cater to any large voting block.

What we need now is a Union of Voters to counter this growing tyranny. Let's demand Constitutional changes to give the strength back to those who built this nation — We The People!