Is the house of cards falling down?

In the wake of lots of other calamitous financial cock-ups, come even more dire news.

Citi crisis deepens as shares fall further

Citigroup, the United States second largest banking conglomerate, is on the brink of failure.

Its stock price collapse is the canary in the coal mine, wiping out over nine-tenths of the company’s market cap since its 2007 peak, decimating two-thirds of its value just last week alone.

At the same time, the collapse in its market cap is also the bank’s nail in the coffin, making it virtually impossible for it to raise the capital it desperately needs to save itself.

At mid-year, June 30, 2008, the Office of the Comptroller of the Currency (OCC) reported that Citi’s primary banking unit, Citibank NA, held $37.1 trillion in total notional value derivatives, including $3.6 trillion in credit default swaps, which, in recent months, have proven to be the most dangerous category.

In contrast, Wachovia bank, bought out by JP Morgan Chase in a deal brokered by the regulators, had only $4.4 trillion in derivatives, among which $404 billion were in credit default swaps, or only one-ninth the size of Citigroup’s.

Thus, whereas it was possible for the authorities to arrange buy-outs for banks like Wachovia and Washington Mutual, there is no buyer big enough in the United States to absorb Citigroup. Nor is it likely that an international consortium of banks would want to squander the precious capital they have left on a sinking titanic the size of Citigroup.

Gulp. And this isn’t just a US thing. As Guido reported the other day, Northern Rock’s £35 billion Granite Trust is looking increasingly to be a worthless asset.



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