Harm to Americans From "Pretend and Extend"
by CIGA Richard B
We have been discussing Washington’s strategy of letting US banks assign their own, individually calculated values to the least wanted, least sellable “toxic” assets on their balance sheets. This was accomplished by pressuring the Financial Accounting Standards Board (“FASB”) to suspend fair value accounting requirements for these assets beginning the first quarter of this year.
Banks responded by assigning values many times what they could sell them for, generating false paper profits that gave the banking sector the illusion of getting better. This is the “pretend” part of your aptly named “pretend and extend” strategy.
The following two articles highlight the danger this sanctioned “pretending” poses to the American people. We see that Citigroup is ready to launch a $15-$17 billion equity offering in order to try to pay back its $20 billion in TARP bailout funds.
All of the major banks’ eagerness to pay back TARP funds stems from their resentment at laws passed after the fact limiting the pay of executives at banks that received TARP funds. It does not reflect improved financial health.
This explains the statement that “Citi’s regulators [are] concerned that the bank may not be strong enough to pay back the [TARP] funds.” Washington’s “pretend” strategy empowered bank management to (again) put its own interests ahead of the bank’s shareholders, the regulatory structure and the American public.
We see that at the very least, Citi’s actions will be terribly dilutive of its existing shareholders. If the repayment causes the bank’s finances to become unstable, that becomes a problem for the FDIC and the American people, as it has already been established that Citi is too big to fail.
Next, we see that Washington’s “pretend” strategy is giving the Kuwait Investment Authority (“KIA”) an opportunity to pull out the $3 billion equity investment it make in Citi in January 2008. This is one of the equity investments banks had to scramble to find back when they were being forced to admit the toxic assets on their books were rapidly declining in value.
The KIA was initially “bagged.” The value of its investment began to plunge as Citi was forced to admit higher and higher losses from its toxic assets over the ensuing quarters. However, when Washingon’s “pretend” strategy kicked in this year, Citi and other banks were permitted to reverse this process and declare false paper profits from the soaring value of these same toxic assets. Now that the value of Citi’s stock has risen high enough, the KIA finally has a change to get its money out at a nice profit.
Yet we also see that the KIA is not leaving happy. It knows it almost lost its entire investment because Citi’s management was not wholly forthcoming about the extent of losses on Citi’s balance sheet. It also knows the only reason that it has the opportunity to escape the situation is the US government-sanctioned creative accounting of the value of Citi’s toxic assets. So not only is it taking back its initial investment and running, it’s also going to remove all the deposits it has historically placed with Citi from its oil sales.
We next have to ask who the parties are that pumped up the value of Citi’s stock by coming in and buying this year. The answer is, whichever investors did not figure out that all the bank’s newly found profits were a government-sanctioned accounting trick. In all likelihood, the bulk of them are American investors through their individual accounts, pension fund and mutual funds.
So, in the final analysis, Washington’s “pretend” solution to this economic crisis is not victimless. The American people have been lulled into making unsound investments, will be paying off the banks’ depositors through the FDIC and will be paying to keep the too-big-to-fail banks alive once they can no longer pretend they are healthy.
Citigroup in talks for equity offering
By Francesco Guerrera and Henny Sender in New York
Published: December 9 2009 21:45 | Last updated: December 10 2009 01:44
Citigroup is in advanced talks with regulators over plans to raise more than $15bn in an equity offering, in an effort to repay $20bn in bail-out funds as early as Thursday.
People close to the situation said that Citi was also planning to raise around $2bn of mandatory convertible securities – a new form of security that converts into equity when a bank’s capital ratio falls below a predetermined level.
The talks were at a delicate stage and could collapse without a deal as some among Citi’s regulators were concerned that the bank might not be strong enough to repay the funds from the troubled asset relief programme, these people said.
Citi faces snub from Kuwaitis
By Henny Sender in New York
Published: December 9 2009 23:30 | Last updated: December 9 2009 23:30
The Kuwait Investment Authority has held internal discussions about scaling back its banking relationship with Citigroup in a move that could include transferring funds currently deposited with the US bank, people familiar with the matter say.
A withdrawal of KIA funds from Citi would mark another setback for the bank as it seeks to recover from the financial crisis and pay back government bail-out funds.
According to KIA officials, most of Kuwait’s oil revenues are deposited at Citi – a decades-long relationship.
Dear CIGAs,
Here is a note to the physical gold buyer CIGAs.
The cheapest gold is on the Comex. Coin premiums have gone through the roof and are being bought like crazy.
Why would you pay a 35% premium when you can buy gold at the cash price? Triple Witch tends to be an ideal time for purchase.
Respectfully,
CIGA JB Slear, "The Real Stuff Delivery Man"
Dear CIGAs,
Yesterday, Fort Wealth/PFG Precious Metals Inc. had the smaller denomination coins (less than 1 ounce gold Eagles) for sale at a 35% +/- markup (not including freight) from the spot price. Now they are sold out too… It’s a wonder why Gold is trading so low with all this demand picking up. Treasury Sales will be done today and Friday is the last trading day for December currency contracts. Next week is the infamous Triple Witch Week. Routinely this is the quarterly time period when gold/silver makes their correction and start to move higher going into the next quarter. Those that wish to get the 100 ounce bars from COMEX (obviously the best price out there) best have their accounts open and funded and have a December Gold contract in the account before Christmas Eve close, or they will have to wait for delivery in January 2010. Happy Holidays and happier trades to you all!!
CIGA JB Slear
Fort Wealth Trading Co LLC.
866-443-0868 Ext 104
817-717-5489
Fax;817-764-2537
www.FortWealth.com
Jim Sinclair’s Commentary
The final pillar of gold’s foundation is the breakdown of the 23 year bull market.
That breakdown will be a currency event.
Jim,
It’s easier to see the subtle cracks in the bond market when studying 30-Yr yields.
CIGA Eric
Click chart to enlarge
Jim Sinclair’s Commentary
Here is the Formula, Pretend and Extend, in chart form. Courtesy of CIGA Eric.
Click to enlarge
Dear Jim,
"The danger point comes not now, and not in 2010, but at the start of 2011", so says Lady Vadera who was the main economic advisor to Gordon Brown in last year’s financial crisis. She says she still has nightmares about it.
Click here to view the article in The Telegraph…
Best regards,
CIGA Jeroen
Dear Jeroen,
You might inform Lady Vadera that Jim expects it on or before January 14th 2011 and Martin feels it will occur in June of 2011.
One of us will be right.
Respectfully,
Jim
Dear Jim,
I guess bailouts for bankers comes ahead of putting New York kids through school. What is this world coming to!
Best,
CIGA BT
"ALBANY, N.Y. — Gov. David Paterson said Wednesday that New York has run out of cash and he’s directing budget officials to reduce state aid payments to schools, local governments and nonprofit service providers until things improve."
