On Thursday this website had stated that Citigroup wouldn’t survive without a government bailout. And they have been bailed out during the weekend. We also noted here that the 700 billion of Tarp was far from being enough. And recently the President-Elect has been speaking about another trillion for the US economy, as the Fed is adding another 300 billion to its toxic assets. So the Tarp has almost been tripled already. And there will be more.

Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets of $306 billion and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.  In return for the cash and guarantees, the government gets $27 billion of preferred shares paying an 8 percent dividend and warrants equivalent to a 4.5 percent stake in the company. The warrants accompanying the preferred shares give the government the right to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment. The $20 billion of new cash adds to a $25 billion infusion the bank collected last month under TARP.

Under the asset guarantees, Citigroup will cover the first $29 billion of pretax losses on the $306 billion asset pool, in addition to any reserves it already has set aside. After that, the government covers 90 percent of the losses, with Citigroup covering the rest.

Dividend Cut

The cost of the new preferred shares will reduce earnings left over for common shareholders. Under the terms of the deal with the government, Citigroup also has to slash its quarterly shareholder dividend to 1 cent from 16 cents.

The asset guarantees and capital infusion will boost Citigroup’s Tier 1 ratio — a gauge of the bank’s ability to withstand loan losses — to 14.8 percent, from 8.19 percent at the end of September. A bank needs a 6 percent Tier 1 ratio to meet the regulatory requirements for “well-capitalized” status, and Citigroup has at least $100 billion more capital than it needs to reach that threshold, Citigroup CFO Gary Crittenden said.

Vanishing Value

Citigroup’s market value, which at $274 billion at the end of 2006 was bigger than any of its U.S. rivals, has since slumped to $31 billion, ranking No. 6 behind JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., U.S. Bancorp and Bank of New York Mellon Corp.

Citigroup remains vulnerable to losses on loans and securities outside the U.S., said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees $8 billion and holds Citigroup shares. The bank also is keeping its credit-card and consumer-finance loans, where delinquencies also have surged.

The government plan “gives them a little bit of breathing room, but longer term, things may deteriorate and losses increase,” said Kovalski. “The Achilles heel with Citi is their exposure to emerging markets and what’s going to happen when emerging markets turn down, as they’re doing now.”

Hedge fund redemptions are continuing:

Millennium Partners LP, the $13.5 billion hedge-fund firm run by Israel Englander, plans to return $1 billion to investors who asked for their cash back by year-end, according to two people familiar with the matter.

The redemptions, equal to 7.4 percent of client assets, would have been higher except they triggered limits set by the New York-based firm, said the people, who asked not to be identified because the information is private. A spokeswoman for Millennium declined to comment.

 “We’re seeing the result of hedge funds’ being subject to the whims of those in asset allocation,” said Adam Sussman, director of research at Tabb Group LLC, a New York-based adviser to financial-services companies. “No fund is immune.”

Investors pulled $40 billion from the loosely regulated, private pools of capital last month and market losses cut the assets by $115 billion to $1.5 trillion, according to Chicago- based Hedge Fund Research.

Different Restrictions

Some Millennium investors might rescind redemptions before year-end, which would prevent the limits, known as gates, from taking effect, said one of the people. Each share class of the fund has different rules that restrict the amount clients can withdraw.

And U.S. stocks are posting the biggest two-day rally since 1987 on Citigroup, according to Bloomberg:

U.S. stocks posted the biggest two- day rally since 1987 after the government guaranteed $306 billion of troubled Citigroup Inc. assets and lawmakers pledged to pass another economic stimulus package.

The S&P 500 surged 6.5 percent to 851.81, capping a two-day gain of more than 13 percent. The Dow Jones Industrial Average climbed 396.97 points, or 4.9 percent, to 8,443.39. The Nasdaq Composite rose 6.3 percent to 1,472.02. Europe’s Dow Jones Stoxx 600 climbed 8.4 percent, while the MSCI Asia Pacific Index slipped 0.7 percent.

Obama today announced Lawrence Summers, a former Treasury Secretary who stepped down as president of Harvard University in June 2006, as White House economic director. He said policy makers had to “act swiftly and act boldly” to avert the loss of millions of jobs next year.

Concern that Citigroup may need a government rescue sent bank stocks down 24 percent last week, the worst slide in at least 19 years.

Energy companies in the S&P 500 climbed 6.1 percent collectively as oil rallied 9.2 percent to $54.50 a barrel in New York as the rescue of Citigroup boosted confidence and a weaker dollar enhanced the appeal of commodities.

Daily swings of 3 percent or more in the S&P 500 have became the norm as the benchmark gauge of U.S. equities extended losses in its worst year since 1931. During the first nine months of 2008, the index moved at least 3 percent on 14, or 7.4 percent, of the 189 trading days, and there were only two days when it gained or lost more than 5 percent.

Only November 1929 overshadowed October 2008 as the most volatile month for the index, according to S&P analyst Howard Silverblatt, citing moves of at least 1 percent on 86 percent of last month’s trading days.


The dollar is rising, and while reappraisal of the global economy may lead to further strength for the dollar in the coming 6-12 months, it’s important that we put the macro picture into perspective when analysing the direction in the forex markets.


When there is no excessive divergence in interest rates or central bank policies, one should expect currencies to perform according to the underlying fundamental strength of the respective economies.


Such is the case between Europe and the US, where the rate differential is too small to override macroeconomic concerns. Since the introduction of the Euro, and except for a brief period during the global stock market bubble, the behaviour of the euro-dollar pair has beem based on fundamentals. The overextended finances of both the public and private sectors in the US contrasts unfavorably with the balanced current account situation of Europe, the relatively less leverage of its citizens, and the much better fiscal discipline of the governments. Until recently even Spain’s government could boast of a singnificant fiscal surplus, and on the whole the stringent requirements of the euro area treaties, and continuous urging by the ECB for fiscal responsibility allowed Europe better fundamentals than those of the overextended, overleveraged US. There’s, in short, every reason to be negative on the dollar versus the euro, based on the fundamentals of the two economies: The dollar is just another word for leverage and indiscipline.


When the Fed began reducing rates in September 2007, in spite of external financing concerns, and fears of inflation, investors and speculators around the world reacted by buying commodities and selling dollars, partly in anticipation of decoupling, and partly to profit from the dollar-negative momentum. And they were justified in their pessimism for the US dollar, except for one difficulty:


The USD is the world’s currency for trade: it’s supply will be ample during times of increased economic activity, as the supply of USD from exporters to the US, and also from global players such as hedge funds and mutual funds widely exceed the USD demand for imports such as oil, copper, and finished goods. Thus, as greed, and the quest for yield cause ever greater amounts of US dollars to be exchanged for other currencies, the buoyancy of the global economy will also draw down the value of the dollar, especially when the medium term fundamentals of the US economy are as weak as detailed in the previous paragraph.


When however, the opposite happens, and global demand contracts, as the growth of demand for commodities, the volume of international trade is in danger of declining, there will be less circulation of the dollar, and the currency of international trade will also see increasing demand, just as the supply of dollars from international economic actors contracts as a result of the same reasons: the prospect of weaker economic activity will cause repatriation flows, extracting dollars from the global financial system, and in the worst cases, as we’re witnessing now, a shortage of the US currency.


This then explains why the discrepancy between the value of oil and the euro versus the dollar created an arbitrage opportunity, provided that the investor sees them as different faces of the same investment paradigm. Indeed until recently the fluctuations of euro-dollar parity, and the oil price showed a close correlation even of intraday movements. It was only natural that one would follow the other.


Now, if rising dollar means less global economic activity, at a time when internal demand in the US is likely to shrink as a consequence of deleveraging, and rising unemployment, then how do we explain the recent rise in stock prices? Rising dollar and rising yen are the hallmarks of pessimism and fear; if US and Japanese investors are withdrawing funds from overseas, putting it in bonds and cash, is it possible to interprete this phenomenon as being positive for financial markets?


While the disinflationary effect of the rising dollar is welcome, one must remember that even before the recent turmoil, there were significant inflationary pressures in the world economy. The era of cheap Chinese labour is already over – inflation is now a structural problem, not a temporary one.


We’re likely to see continued falls in the stock markets in the next few weeks, and months.