Stock prices plunging. Credit default swaps skyrocketing. rumours starting to spread about collateral calls. Congress dithering over a bailout. Top bankers heading for the exits. It all seems too familiar.
Peter Cohan thinks that Citi may become our biggest financial catastrophe. More likely: another government bailout.
The risk on Citi’s balance sheet is literally incalculable. It is only possible to imagine how much financial firepower is targeted at wiping out its slim capital. At the end of September, Citi had only $126 billion in shareholders’ equity arrayed against enormous risks — including $37 trillion in derivatives and $1.2 trillion in off balance sheet — special purpose entities (remember Enron?).
But Citi’s problems could also come from good old fashioned loan losses like the $1.4 billion hit it took for the bankruptcy of LyondellBasell — a borrower that filed for bankruptcy last week. After all, Citi has $68 billion worth of home equity loans with poor documentation and $166 billion in foreign-consumer loans, which are outside U.S. government guarantees.
Something is going to happen this week with Citi, and I am afraid it will involve throwing more tax money after Citi’s bad bets.