One of the more embarrassing things made clear by the stress test results released earlier this evening is the terrible quality of Citigroup’s second lien residential mortgagge portfolio.
Under the adverse case tested by bank regulators, Citigroup stands to lose $12.2 billion on its residential mortgages. But it’s not the total amount of losses that is so jaw-dropping–both Bank of America and JP Morgan Chase are predicted to lose even more.
What is truly shocking is the loss percentage on the portfolio. According to the stress tests, the portfolio stands to realise losses amounting to 19.5 per cent, nearly one-fifth, of its total value. That’s not the worst among the banks tested. Both GMAC and Capital One have worse expected loss percertages, 21.2 and 19.9. But the size of their portfolios are much smaller.
The fact that Citi loaded itself up with such a large amount of toxic mortgages boggles the mind. They really must have been scraping the bottom of the barrell, buying up risky loans in a desperate search for yield.