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Conduit Risks Are Hovering Over Citigroup
Wall Street Journal ^ | Sept. 5, 2007 | DAVID REILLY, CARRICK MOLLENKAMP and ROBIN SIDEL

Posted on 09/08/2007 2:08:26 PM PDT by hripka

If the Vehicles Go Sour, Rescues Could Be Costly; Bank Has 'No Concerns'

Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper.

The investment vehicles, known as "conduits" and SIVs, are designed to operate separately from the banks and off their balance sheets.

Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission.

Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses.

(Excerpt) Read more at online.wsj.com ...


TOPICS: Business/Economy; News/Current Events
KEYWORDS: citigroup; conduit; debt; sec; subprime

1 posted on 09/08/2007 2:08:27 PM PDT by hripka
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To: hripka

Could someone with some economics savvy translate this into English; does this represent a hazard to generalized bank solvency and all our garden-variety savings and checking accounts?


2 posted on 09/08/2007 2:11:38 PM PDT by Jack Hammer
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To: Jack Hammer
ain't got no savvy, but, no, not yet. this is a credit squeeze.

and your garden variety accounts ought to be insured by fdic.

3 posted on 09/08/2007 2:27:23 PM PDT by the invisib1e hand (I'm an endangered species. And I don't want your protection.)
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To: the invisib1e hand

It used to be that banks could not sell insurance, nor insurance companies offer banking services, checking accounts, nor banks run brokerages, nor brokerages offer CDs, etc, you get the idea.

Apparently Glass-Steagall regulations established in the wake of the ‘29 crash have been relaxed since ‘99 or thereabouts. Too it doesn’t seem credible that existing or potential stockholders should be exposed to billions in off-the-radar, unregulated and ininsured losses or speculation either, but that appears to be the case.

FDIC ought to cover any losses incurred but ironically FDIC legislation seems to foster this kind of thing in theory - nobody pays any attention to their banks or savings institutions because “it’s insured up to $100,000 so who cares.”


4 posted on 09/08/2007 2:36:53 PM PDT by Freedom4US
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To: Jack Hammer

“Could someone with some economics savvy translate this into English; does this represent a hazard to generalized bank solvency and all our garden-variety savings and checking accounts?”

If this were an easy question, economists, accountants, and lawyers wouldn’t earn such big paychecks. :-) But yes, there is a bottom-line hazard; how great it is, and how it will play out, yet remains to be seen.

The twin dangers are an intricately interlocked global financial system coupled with accounting rules that allow corporations to play ‘hide the penny’ in Enronesque ways. “Special Purpose Entities” (SPEs; or substitute “Vehicles” for SPVs - the sorts of corporate shenanigans that brought down Enron) and “Structured Investment Vehicles” (the SIVs mentioned in the article) allow corporations, under certain circumstances, to omit some types of financial transactions from their publicly reported records and results, making these transactions at best opaque, at worst invisible, both to financial analysts and to government regulators. Because the financial dots are not publicly connected, events can have unanticipated consequences, resulting in market instability.

These unanticipated consequences come into view only after the fact, making it difficult for markets to smoothly deal with these sorts of crises. The markets have to react on their feet, as it were, which can lead to irrational behavior, herd-think, and panic.

It’s important to realise that this is a result of man-made rules, and not the inexorable workings of pure economics. Dangerous conditions can be ameliorated by changing the rules to prevent corporations and their legal and accounting handmaidens from gaming the system. At root is the fact that gaming the system has financial benefits for the bottom line, hence there are incentives for playing these balance sheet games. Unfortunately, every change in the accounting rules spurs lawyers and accountants to come up with ever more “creative” ways to take advantage of the new rules. I think that these fundamental problems may be addressed only by completely re-thinking corporate law and governance from the ground up - but that’s a story for another day. :-)


5 posted on 09/08/2007 3:04:47 PM PDT by TrueKnightGalahad (Your feeble skills are no match for the power of the Viking Kitties!)
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To: Freedom4US
FDIC ought to cover any losses incurred but ironically FDIC legislation seems to foster this kind of thing in theory - nobody pays any attention to their banks or savings institutions because “it’s insured up to $100,000 so who cares.”

True! But thousands of "Insured Customers" waited for a long, long time to get a check from the FSLIC when the Savings & Loan debacle took place!!!

As for the restrictions on many financial activities, they had a damn good reason for being enacted and "Deregulation" may very well become a thing of the past if (or when) the SHTF!

6 posted on 09/08/2007 3:10:57 PM PDT by ExSES (the "bottom-line")
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