Citigroup VIEs Raise Question Of Solvency

Bloomberg is reporting Goldman, Lehman May Discover They Haven't Dodged Credit Crisis.

Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis.

The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short- term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses.

My Comment: This is yet another reason why there is a fraudulent attempt to prop up the debt rating of MBIA and Ambac.

MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

My Comment: So VIEs have one rating if they are hidden but a different rating if they are pooled together? Excuse me for asking, but didn't we just go through this with pools of CDOs lumped together and rated AAA?

The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve.

"There's a big number at work here and it will have significant consequences," said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. "The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse."

One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.

My Comment: How many types are there?

Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.

My Comment: I see we can hold CDOs inside of VIEs. I suppose we can hold VIEs inside of SIVs. As for me I want to trade VIEs squared. It would be a travesty of justice if we could trade CDOs squared but not VIEs squared. Heck, I've changed my mind already, what I really want to do is trade (CDOs inside of VIEs) squared.

Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $7.5 billion of VIE assets as of Nov. 30, according to a filing also made on Jan. 29.

"We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints," Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn't elaborate.

My Comment: Now I see we have Faith Based VIEs. Kerrie Cohen wouldn't elaborate probably because the structure is so complicated no one knows what it even is. Nonetheless, I am quite sure the structure is rated AAA by Moody's, Fitch, and the S&P.

Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in "significant unconsolidated VIEs," according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch & Co., which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.

My Comment: Is there a snowballs chance in hell Citigroup is solvent?

The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights.

My Comment: Heck, there's your answer right there already.

Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

"The disclosure on VIEs is hopeless," Azarchs said. "You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup."

Bank Failures Expected

After reading the above article it should come as no surprise that the FDIC Adds Staff as Bank Failures Loom.

The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

Last Warning

If you are over the FDIC limit at any bank, do something about it immediately.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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