Bad Paper

Additional write-downs of $8.9 billion are in the future for CitiGroup, Inc according to Goldman Sachs. As reported in an article by Cathy Chan in Bloomberg, the banking and financial giant may need to take another $7.1 billion loss on collateralized debt obligations and another $1.2 billion for other assets.

According to the Goldman Sachs report, the Citi dividend may be the next to go, “Given the firm’s current level of earnings power, we do not believe the dividend is safe. We believe any additional capital raises will be in the form of common equity, dividend cuts and or additional asset sales.”

Goldman also reported that “The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought. We see multiple headwinds for Citigroup, such as risks of further writedowns, higher consumer provisions, and the potential need for additional capital raisings, dividend cuts or asset sales.”

There is a short blurb by Aline van Duyn in the Financial Times reporting that Ambac, MBIA, and FGIC are in talks with Wall Street banks about voiding their obligations under $125 billion of credit default swaps. According to the article, the strategy may “the only way to limit the financial damage surrounding the bond insurers”.

The FBI has made a formal request to travel to Switzerland as part of an investigation into UBS AG, according to the Swiss newspaper Sontag and reported in the U.S. by Bloomberg.  The FBI investigation appears to be related to charges that the Swiss bank help U.S. citiziens evade income taxes.  According to the article, a prerequisite for providing Swiss legal assistance to a foreign country is that alledge actions be considered a crime in both countries.

Morgan Stanley is the latest investment firm to book significant losses due to the activities of a rogue trader. The firm revealed that its London office had suspended a trader that attempted to hide losses of $120 million.

According to a story by Tom Bawden in the online edition of The Times, the employee, identified in the article as Matt Piper, was under investigation for what Morgan Stanley referred to as a “$120 million negative adjustment to marks previously taken in a trader’s book that did not comply with the firm’s policies”. The trade reportedly involved credit derivatives.

HBOS, the biggest mortgage lender in the U.K. predicted home prices would fall 9 percent this year. The lender also reported that problem residential loans at the bank increased 17 percent. In response, the company took new write-downs of nearly 200 pounds, much of it related to home builders.

The bank is seeking to raise an addition $7.8 billion (US) in new capital.

The residential real estate market in Southern California remains in critical condition. According to an article by Roger Vincent in the Los Angeles Times, home prices in SoCal plunged 27% from May of last year. In addition, the rising price of gasoline is compounding the problem for most of the more outlying areas.

Christopher Leinberger of the Brookings Institution is quoted in the article, “Under the old model we have lived with for the past 50 years, you could drive away from major employment concentrations until you could qualify for a house because cheap energy costs made it possible. Now as energy prices go up, the housing prices out there on the fringe take a major hit.”

A survey by DataQuick Information Services reported that the median home sale price in six Southern California counties sank to $370,000 in May, down from $505,000 the previous May.

Federal criminal and civil charges may be forthcoming as Federal prosecutors and the SEC investigate hedge funds sponsored by Bear Stearns. According to Bloomberg and the Wall Street Journal, Fed officials may bring criminal charges against former hedge fund managers Ralph Cioffi, and Matthew Tannin.

Cioffi managed two Bear Stearns hedge funds that collapsed under the weight of heavy investments in subprime related assets. Tannin assisted Cioffi in managing the two funds.

Cioffi, Tannin and Bear Stearns are named as defendants a seperate lawsuit filed by Barclays PLC. The suit accuses Cioffi of withdrawing a personal investment in the fund in March 2007 at the same time Bear Stearns was persuading Barclays to increase its investment.

Yet another chief of a troubled financial firm bites the dust.  American International Group, Inc., Chief Executive Martin Sullivan has resigned from the big insurer according to the Wall Street Journal.  Sullivan is yet another in a long and growing list of financial executives that have lost their jobs at least in part due to massive losses related to the U.S. mortgage market.

Robert Willumstad,  chairman of AIG’s board, will replace Sullivan.  Stephen Bollenbach, the former CEO of Hilton Hotels and another AIG board member, will be the lead director.

Lehman executives have reportedly been summoned to meet at their headquarters this weekend. The speculation is that the firm may be sold. Reportedly, Blackstone is interested in acquiring a stake in the Wall Street firm. According to CNBC.com, the executives summoned to headquarters include everyone from Stephen Lessing, the head of Lehman private client group to Scott Freidheim, the firm’s co-chief administrative officer.

A month after it was reported that Moody’s Investor Services had erroneously rated Constant Proportion Debt Obligations (CPDOs) as triple-A, Standard & Poor’s has disclosed that it has found an error in their CPDO ratings model. However, S&P has indicated that their glitch has not affected the ratings on the bonds.

“We discovered one error in a trial version of one of our models that was used in connection with the initial ratings on five public CPDOs and briefly used for surveillance analysis. This error did not result in a ratings change and was caught and remedied by our ratings process. In the interest of full transparency and openness, S&P has disclosed this situation to the SEC,” reported a statement from Vickie Tillman, executive vice-president at S&P.

Foreclosures postings scheduled for this July in the Dallas/Ft. Worth metroplex jumped significantly from last year. However the 33% increase is mostly the result of calendar fluke. Last year’s postings were down because the 2007 foreclosure date fell on the day before Independence Day. And many lenders took the extra day off. Nonetheless, over 3,700 homes are scheduled for foreclosure this July, which is significant anyway.

Lehman Brothers, rocked by heavy losses related to the mortgage meltdown, canned their President and demoted the Chief Financial Officer.  Joe Gregory, who had been Lehman prez since 2004 was shown the door today. He will be replaced with Bart McDade, head of the bank’s equities division. CFO Erin Callan will be replaced by Ian Lowitt, co-chief administrative officer.

The London Interbank Offered Rate (LIBOR) survey will be broadened to include more banks. The British Bankers Association has decided to make the changes largely in response to recent criticisms that the LIBOR rate has not accurately reflected the borrowing rate paid among banks. It has previously been reported that some banks may have under reported their borrowing rates to avoid acknowledging liquidity problems. The BBA will also consider adding a second daily survey during U.S. trading hours.

The Securities and Exchange Commission and the Justice Department are reportedly investigating the manner in which American International Group accounted for subprime related derivatives. The agencies are reviewing the manner in which AIG valued credit default swaps. Losses on those swaps led to record losses at the insures.

According to an article from Bloomberg as reported in the Los Angeles Times, Chief Executive Martin Sullivan told investors at a Dec. 5 conference that write-downs from the U.S. housing market would be “manageable.” That same day, Joseph Cassano, head of the company’s unit selling credit-default swaps, said the contracts declined by $1.1 billion in the first two months of the fourth quarter. “The effectiveness of our risk-management efforts will show through in our results,” he said. Cassano later stepped down, and the write-downs have since triggered net losses of $5.29 billion for the fourth quarter and $7.81 billion for the first quarter.

The Financial Services Agency, Japan’s financial regulator, announced that losses related to the U.S. subprime market may approximate $8 billion (US). That is a 42 percent increase from the previous estimate in December. The FSA loss estimate includes both realized and unrealized losses. Exposure to the U.S. mortgage market is largely through holdings of structured mortgage products.