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Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings

 
Omega
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Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
Can you say misdirection, subterfuge, and maximum bamboozlement?

I knew you could.

The banks will do ANYTHING to not divulge the truth.

And the truth is:

They are insolvent.

Always keep in mind the two words that a banker will avoid like light to a vampire.

Bank run.

Soon.

Near you.




[link to www.bloomberg.com]

Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings

By Bradley Keoun
Enlarge Image/Details

July 14 (Bloomberg) -- At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup's balance sheet, accompanied by more than $7 billion of losses.

``If you start adding up all the potential exposures, it's a huge number,'' said Sam Golden, a former ombudsman for the U.S. Office of the Comptroller of the Currency who now heads the financial-industry practice for restructuring adviser Alvarez & Marsal in Houston. ``The banks will say that it was disclosed. Investors are saying, `Yeah, but it was cryptic. We really didn't know what you were telling us.'''

U.S. banks already are reeling from more than $165 billion of writedowns and credit losses, so shareholders are wary of unknown obligations that might force them to take responsibility for additional troubled assets. The risks have become so obvious that accounting officials are proposing new rules -- some of which Citigroup opposes -- that would force many assets back onto balance sheets.

On the Hook

Seven of the biggest U.S. banks, including Citigroup, are on the hook for at least $300 billion of credit and liquidity guarantees for off-balance-sheet loans and bonds, according to a June 30 report from consulting firm RiskMetrics Group Inc. in Rockville, Maryland. Such guarantees were remote when pledged as an inducement to bond buyers. Now, the first year-over-year decline in housing prices since the Great Depression and rising home-loan, commercial-mortgage and credit-card delinquencies have begun to trigger them.

``You will rapidly realize what a farce these off-balance- sheet things are,'' said Ladenburg Thalmann & Co. analyst Richard X. Bove. ``You could pick up a lot of loan losses with the stuff you're putting back on.''

It's impossible to predict what the losses might be from off-the-books assets or liabilities because disclosures are thin relative to what is required for balance-sheet assets, said Neri Bukspan, chief accountant for Standard & Poor's in New York.

``A lot of information tends to disappear or becomes second or third class,'' Bukspan said.

Second-Quarter Loss

Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he's trying to unload in the next three years.

The bank probably will report a second-quarter net loss of $3.7 billion later this week, according to the average estimate of seven analysts surveyed by Bloomberg. A loss would be the company's third straight and add to $15 billion of losses recorded during the previous two quarters.

Citigroup plunged 69 percent in the past year in New York Stock Exchange composite trading. It closed at $16.19 on July 11, down 52 percent from April 6, 1998, when Citicorp agreed to form the modern company by merging with Sanford ``Sandy'' Weill's Travelers Group Inc.

JPMorgan, Merrill

JPMorgan Chase & Co., which has more than $400 billion of off-balance-sheet assets, also reports second-quarter results this week. The New York-based bank, the largest U.S. bank by market value, may say second-quarter profit fell 55 percent to $1.9 billion, analysts estimate.

Merrill Lynch & Co., the third-biggest U.S. securities firm by market value, also reports results this week. New York-based Merrill had to buy about $4.9 billion of mortgage-linked assets last year from an off-balance-sheet financing vehicle, resulting in a $170 million loss. It may post a second-quarter loss of $1.56 billion after reporting about $14 billion of net losses in the previous three quarters, according to a Bloomberg survey of 11 analysts.

``The riskiest assets we had, our CDOs, weren't even on our balance sheet,'' Merrill Chief Executive Officer John Thain said on a June 11 conference call with investors. Merrill would have to provide $15 billion in financing for CDOs and related obligations under a ``severe stress scenario,'' according to a Merrill regulatory filing published in May.

VIEs, QSPEs

The Financial Accounting Standards Board, the five-member panel in Norwalk, Connecticut, that sets U.S. accounting rules, voted [=^]earlier[^=] this year to eliminate ``qualifying special- purpose entities,'' or QSPEs, a category of off-balance sheet financing exempted from tighter standards enacted following the collapse of U.S. energy trader Enron Corp. FASB also plans to clamp down on ``variable interest entities,'' or VIEs, that banks used when their vehicles couldn't qualify as QSPEs. And it voted June 11 to force banks to consolidate off-balance-sheet assets whenever an ``obligation to absorb losses can potentially be significant.''

Banks are required to disclose their off-balance-sheet assets in annual reports. According to Citigroup's most recent financial statement, filed in May, the bank's $1.1 trillion of off-the-books assets as of March 31 included $760 billion of QSPEs and $363 billion of unconsolidated VIEs.

`Full Disclosure'

``Our quarterly financial report provides full disclosure of our off-balance-sheet assets, including our maximum exposure to assets in unconsolidated VIEs,'' Citigroup spokeswoman Shannon Bell said. That figure was $141 billion as of March 31 and included funding commitments and guarantees, company reports show.

To lose the full amount, all the assumed assets would have to be written down to zero. The figure exceeds Citigroup's market value of about $90 billion, which dropped more than $180 billion since the end of 2006.

Citigroup's financial statement also says that about $517 billion of the QSPEs are related to mortgage securities, and that they are ``primarily non-recourse,'' which means the risk of future credit losses is transferred to purchasers.

Sharon Haas, an analyst at Fitch Ratings, said anyone who has studied Citigroup's disclosures would be familiar with the off-balance-sheet risks.

``A lot of these so-called off-balance-sheet exposures, there's no mystery about this,'' Haas said. ``Whether they're on or off balance sheet is frankly not as important from an analytical perspective as understanding the inherent nature of the businesses that they're involved in.''

`Impractical' Rule

Pandit, 51, who replaced Charles O. ``Chuck'' Prince III as CEO in December, said in a June 27 report posted on Citigroup's Web site that regulatory reform must include ``public disclosures to investors about pertinent risk and financial information that give the market a chance to make informed judgments.''

The comments came after Robert Traficanti, Citigroup's deputy controller, sent a letter to FASB Chairman Robert Herz on June 9 objecting to a provision that would force banks to reevaluate their off-balance-sheet assets and liabilities every quarter. Citigroup has more than 7,000 VIEs and more than 100 QSPEs, he wrote.

``We believe that this model is impractical from an operational standpoint,'' Traficanti wrote. ``We would not be able to perform this analysis given the resources we currently have. We would need to hire many more accountants.''

Capital Concerns

Regulators may part ways with accounting overseers and grant banks a waiver from having to raise capital against assets that have to be consolidated on the balance sheet, said Tanya Azarchs, a managing director at Standard & Poor's in New York.

``They really don't want to introduce any more instability into the banking system,'' Azarchs said.

Mortgage-finance agencies Freddie Mac and Fannie Mae plunged to their lowest in 17 years in New York trading last week, partly on concern that off-the-books assets might swamp their capital.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight in Washington, said on July 8 that an ``accounting principle should not drive a capital decision by a regulator.''

That doesn't mean regulators aren't paying attention. Examiners keep offices inside the headquarters of large banks, and they have access to non-public records that help them analyze off-balance-sheet risks, said Bill Isaac, a former Federal Deposit Insurance Corp. chairman who is now chairman of Secura Group, a consulting firm in Vienna, Virginia.

What-If Scenarios

``The bank examiners are probably more thorough now and even skeptical in looking at these things,'' Isaac said. ``They're probably doing more what-if scenarios and stress tests. People thought there was a 1-in-100 chance of something happening, and as we see now, it has happened.''

Citigroup had $25 billion of ``liquidity puts'' -- a kind of guarantee -- last year on off-balance-sheet ``commercial paper CDOs'' set up to sell short-term debt known as commercial paper, according to the May financial statement. In the second half of the year, after a surge in market rates for the commercial paper, the bank had to preempt the formal exercise of the guarantees by buying the debt, according to the statement.

By the end of 2007, the full amount had been brought back on the books. The assets had to be written down by $4.3 billion in the fourth quarter and $3.1 billion in the first quarter. The remaining balance stood at $16.8 billion as of March 31.

Failing SIVs

The commercial-paper CDO assets are in addition to the assets Citigroup took over last December from its failing SIVs. In that case, the bank didn't have a contractual guarantee; it intervened to cushion the losses for its clients. Citigroup had $212 million of losses related to the SIVs in the first quarter, according to the financial statement.

``People say they don't have any liquidity backstop, they don't have any guarantee,'' said Russell Golden, the FASB's technical director. ``But then they act like they always had a guarantee.''

Murkier still are the $15 billion of assets Citigroup has had to import this year from four off-balance-sheet hedge funds that unraveled. They include the Old Lane hedge fund that Pandit helped open in 2006. Citigroup bought Old Lane Partners LP last July for about $800 million. Earlier this year, the bank said it would close the fund because Pandit and other Old Lane founders had moved on to management jobs at the bank.

Citigroup incorporated about $9 billion of Old Lane assets into its trading desk.

`Back to Roost'

``You had risks off the balance sheet that came back to roost,'' said Marc Siegel, head of accounting research and analysis at RiskMetrics.

While Citigroup has more off-balance-sheet assets than its peers, it isn't alone. Bank of America assumed about $6.6 billion of commercial paper issued by off-balance-sheet CDOs last year. About $5 billion related to ``written put options'' and $1.6 billion related to ``other liquidity support,'' according to the Charlotte, North Carolina-based bank's financial statements.

Bank of America held $32.1 billion of VIEs on its balance sheet as of March 31, compared with $22.4 billion at the end of 2006. It still has $43.2 billion of VIEs off balance sheet.

JPMorgan has off-balance-sheet ``conduits'' with about $54 billion of commercial paper outstanding, according to its first- quarter financial statement. The bank says it is ``not obligated under any agreement'' to buy the debt. Even so, the bank provided a chart showing the impact if assets had been consolidated: First-quarter net income would have been $2 billion instead of $2.4 billion.

``As soon as the cycle turned, all of these risks started to come back, and companies weren't prepared,'' Siegel said. ``It wasn't transparent to the investors what was going on.''

To contact the reporter on this story: Bradley Keoun in New York at [email protected]
Last Updated: July 13, 2008 19:01 EDT
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.

Disarmament is the precursor to Genocide.

Better to take action now rather than chances later. Your choice.
Anonymous Coward
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07/14/2008 10:19 AM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
bump 5a
Omega  (OP)

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07/14/2008 11:11 AM
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The jig is up. Banking sector crash across the board. damned
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.

Disarmament is the precursor to Genocide.

Better to take action now rather than chances later. Your choice.
WW RAUPP

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07/14/2008 12:13 PM
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Boy am I glad didn't listen to super-perma-bull Ken Fisher who told in August 2007 on CNBC the US banking sector was solid as a rock.
To shape the world is to become immortal
bill shitters

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07/14/2008 12:19 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
U.S. banks already are reeling from more than $165 billion of write downs and credit losses, so shareholders are wary of unknown obligations that might force them to take responsibility for additional troubled assets. The risks have become so obvious that accounting officials are proposing new rules -- some of which Citigroup opposes -- that would force many assets back onto balance sheets

are these the same laws which are in the Basel agreement to make banking mmore open and to combat the present fraudulent sys

my hunch is the only banks to survive this comming catasrophie are the ones that are big and honest
The retired thread killer


Still the killa of threads

we come in peace shoot to kill
[link to au.youtube.com]

I can not talk TO aliens but do listen to the anally probed
Omega  (OP)

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07/14/2008 12:28 PM
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Boy am I glad didn't listen to super-perma-bull Ken Fisher who told in August 2007 on CNBC the US banking sector was solid as a rock.
 Quoting: WW RAUPP



The Infamous WW Raupp, how are you sir?
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.

Disarmament is the precursor to Genocide.

Better to take action now rather than chances later. Your choice.
Enigma

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07/14/2008 12:32 PM
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Yes it is Basel 2 that is causing them so much heartburn..

basically the rest of the banking world has had a enough...

and as the info starts to see the light of day, the TRUTH will come out...

bump for the crash of the liers, thieves and crooks...
WW RAUPP

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07/14/2008 12:59 PM
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Boy am I glad didn't listen to super-perma-bull Ken Fisher who told in August 2007 on CNBC the US banking sector was solid as a rock.



The Infamous WW Raupp, how are you sir?
 Quoting: Omega


Depends... My person is doing ok. Still healthy, still breathing. US financial system isn't doing very well. Last few months I have been busy traveling around and securing my financial future. Normally I am not that much of a doom guy but when we see the following unfolding: collapse of Bear Stearns, IndyMac and Freddie Mac and Fannie Mae ailing... Plus collapsing capital income from shares, bond markets drying up... I'd say we're still on the top layer of shit to come.
To shape the world is to become immortal
Anonymous Coward
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07/14/2008 01:15 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
[link to www.worldreports.org]

Archives

You were warned and chose to not listen,kill the messengers,
and disbelieve Truth when handed to you on a plate.

Now you reap what you have sown.
loosecannon

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07/14/2008 01:17 PM
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Fractional reserve banks are ALWAYS insolvent.

Unfortunately we rely upon them to feed the economy with liquidity.

The WORSE possible thing that could happen is a runaway contraction. As credit markets shrink and the money supply shrinks we could suddenly find ourselves in a position wherein there isn't enough capital in circulation to fuel a recovery.

That's what happened in the banking collapse after 1929 and there was no mechanism then to reinfuse capital into markets except martial law. The depression was technically intractible and a world wide phenom.

Unless you actually WANT to see Armagedon, the single most important thing to avoid is a money supply runaway contraction.

And we are already in the midst of one gathering steam.
Omega  (OP)

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07/14/2008 01:18 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
Boy am I glad didn't listen to super-perma-bull Ken Fisher who told in August 2007 on CNBC the US banking sector was solid as a rock.



The Infamous WW Raupp, how are you sir?

Depends... My person is doing ok. Still healthy, still breathing. US financial system isn't doing very well. Last few months I have been busy traveling around and securing my financial future. Normally I am not that much of a doom guy but when we see the following unfolding: collapse of Bear Stearns, IndyMac and Freddie Mac and Fannie Mae ailing... Plus collapsing capital income from shares, bond markets drying up... I'd say we're still on the top layer of shit to come.
 Quoting: WW RAUPP


Well good to see you around, and glad to see you are on top of things.

Its....glorious,lol....
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.

Disarmament is the precursor to Genocide.

Better to take action now rather than chances later. Your choice.
Anonymous Coward
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tisk tisk and it is the shorts fault didnt ya know.
Anonymous Coward
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07/14/2008 01:27 PM
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hiding this is serious doom
ano
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i saw someting months ago that Saudi bought into citigroup with mega mega billions....so if thier accounts are higher that would explain it..can some one check it out...
ano
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07/14/2008 01:53 PM
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i saw someting months ago that Saudi bought into citigroup with mega mega billions....so if thier accounts are higher that would explain it..can some one check it out...
Anonymous Coward
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07/14/2008 03:39 PM
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Off balance sheet vehicles have been used for years by the banks.

I would agree that it is possible we will see big banks collapse though.
Emerald Empress

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[link to www.worldreports.org]

Archives

You were warned and chose to not listen,kill the messengers,
and disbelieve Truth when handed to you on a plate.

Now you reap what you have sown.
 Quoting: Anonymous Coward 377208


From the latest entry in the World Reports link:

But with International Currency Review Volume 33, 3/4 lodged all over the world 'where it matters', this will not be possible. The enormous presentation not only records the narrative which led to the exposures of embedded financial fraud, but also publishes documents showing how Wantagate led to the present predicted state of affairs, while also showing how the crisis can/will be resolved.

Anyone here a subscriber who can tell us how this all gets resolved?
He who thinks they are happy probably are, but he who thinks himself wise is probably the greatest fool
Anonymous Coward
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07/14/2008 07:30 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
OK, now we've got Raupp on here spouting doom!

that's it!

we're fucked!

ahhh

hiding
Omega  (OP)

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07/14/2008 07:31 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
OK, now we've got Raupp on here spouting doom!

that's it!

we're fucked!

ahhh

hiding
 Quoting: Anonymous Coward 468032


EXACTLY what I was thinking. When Raupp gets on the doomer side-the end is truly nigh.
Handguns are a skill; shotguns an art; rifles a science.
_____________________________________
Democracy is two wolves and a sheep voting on whats for dinner.

Disarmament is the precursor to Genocide.

Better to take action now rather than chances later. Your choice.
Anonymous Coward
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07/14/2008 09:27 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
i saw someting months ago that Saudi bought into citigroup with mega mega billions....so if thier accounts are higher that would explain it..can some one check it out...
 Quoting: ano 467793


Last year they did a large infusion, but the wealthiest Saudi has owned at least 4.5% of CitiBank since 1990:

[link to www.btimes.co.za]

The mystery of the world's second-richest businessman


Prince Alwaleed is the modern face of Saudi royalty, but his sums don't add up, writes The Economist

THE wealth of the ruling family of Saudi Arabia is not normally attributed to business acumen, financial probity or hard work. An exception is the multi-billion-dollar fortune of Prince Alwaleed bin Talal bin Abdulaziz Al Saud. Chairman of his own company at 14, a billionaire at 31, Prince Alwaleed, now 41, is a self-made businessman who has amassed a fortune that he estimates is worth $14.3-billion. Last year Forbes magazine ranked him behind Bill Gates as the world's second-richest businessman. Among the grandchildren of Ibn Saud, the warrior who united the Arabian peninsula in the early years of this century, none enjoys greater prestige.
The prince's renown must delight Saudi Arabia and its allies. The royal family's extravagance and greed have long been an embarrassment - particularly to those who came to Saudi Arabia's aid after Iraq's invasion of Kuwait in 1990. Here, at last, is something to cheer about: a royal prince who is clean-living and generous. And one who has demonstrated a remarkable capacity to make money through hard work and intelligence.

The world has heaped praise on Prince Alwaleed. He is admired as an internationally minded, long-term investor with a record for identifying undervalued companies. Time magazine has labelled him an "Arabian Warren Buffett". Forbes has described him as one of the world's shrewdest investors. In an article in 1995, Business Week said that by 2010 he could be "the most powerful and influential businessman on earth".

Meeting the prince, it is easy to be impressed. Energetic and articulate, he is the sort of man who can sit through hours of meetings, tirelessly pressing his advisers with penetrating questions. In his offices in Riyadh, he has surrounded himself with a young team of well-educated workaholics who clearly admire him. Outside Saudi Arabia, he has built up a network of world leaders and businessmen.

However, his business empire has a mystery at its heart. The Economist has interviewed the prince and his entourage, and examined the accounts of dozens of the companies in which he has a stake, as well as his filings with America's Securities and Exchange Commission (SEC). Our research raises two doubts about Prince Alwaleed. The first concerns the true extent of his success as a stock market investor; the second, the land deals that are the source of much of his income.

During the 1990s Prince Alwaleed's empire expanded at a frantic pace, far beyond its origins in Saudi Arabia. The portfolio is eclectic. His holdings, typically minority stakes, include interests in media, telecoms, information systems, banking, retailing, property, entertainment and hotel-management. He also owns luxury hotels, mostly in partnership with other investors.

The sheer diversity of these investments reflects Prince Alwaleed's view of himself as a bargain-hunter and deal-maker. In his investments outside Saudi Arabia, Prince Alwaleed's role is usually passive. His chief advantage is the cash he has on tap. If a company is suffering from a funding crisis, the prince is one of the world's few private investors who can readily write a cheque for hundreds of millions of dollars.

The combination of high risk and sweetheart deals should yield exceptional returns. Citicorp, Prince Alwaleed's debut as an international investor, shows how well this approach can work. By the autumn of 1990, the bank, then America's largest, desperately needed capital. But Citicorp's search for more than $1-billion from investors had been fruitless. Amid fears that the bank might fail, its shares had plunged.

Enter Prince Alwaleed, then barely known. At the end of 1990 he bought 4.9% of Citicorp's existing common shares for $207-million ($12.46 a share). In February 1991, the prince spent $590-million buying new preferred shares, convertible into common shares at $16 each. This amounted to another 10% of Citicorp, taking his stake to 14.9%.

For a novice, Prince Alwaleed's timing was astonishing. Two weeks later Citicorp's capital crisis passed when a group of international investors bought a further $600-million of new preferred shares. By 1994 the bank's share price had soared and the prince had made his reputation - as well as his fortune.

Citicorp is the perfect example of the exceptional returns that Prince Alwaleed's approach can yield. Unfortunately it is also a rare one. Taken as a whole, Prince Alwaleed's other listed investments outside Saudi Arabia have barely kept pace with their local stock markets. According to The Economist's best estimates, the $2-billion that he has invested in shares after 1992 is now worth $2.8-billion. If the prince were a US mutual fund, his performance would rank in the bottom half of the industry.

One investment in particular has dragged him down. The prince's well-publicised rescue of Euro Disney, listed on the Paris bourse, in 1994 looks like a grave error of judgment. With prospects at Euro Disney bleak, his investment has lost over 25% of its value, whereas the SBF 250 index has more than doubled. And Euro Disney is not the only poor performer.

Moreover, while Prince Alwaleed prides himself on knowing when to buy, he has yet to demonstrate that he knows when to sell. At its peak in April 1998, shortly after Citicorp announced plans to merge with Travelers, an insurer, his stake in Citicorp was worth $7.6-billion. But shares in Citigroup (as it is now known), along with those of other banks, have declined sharply and the value of his stake in the merged group has since fallen by 21%.

None of this would worry the prince. His investments are for the very long term: Citigroup, for example, is "taxiing for take-off again"; with Euro Disney he intends to "be patient and wait". Oddly, neither has it seemed to worry his admirers. Perhaps it is because Prince Alwaleed's stellar reputation is founded more on the sheer scale of his investments than on performance.

And that leads to the second doubt surrounding Prince Alwaleed. He has not earned enough income from his investments to pay for all that he has spent in the 1990s. The mystery goes back to that first stake in Citicorp. The prince has declared that this money came entirely from his personal funds. He says he started out in 1979 with a loan of just $30 000 from his father. He also mortgaged a house that his father had given him, raising something like $400 000. And each month, as a grandson of Ibn Saud, he receives $15 000. You could barely clothe a Saudi prince for such sums, let alone furnish him with a multi-billion-dollar empire. Nevertheless, by 1991 Prince Alwaleed had felt able to risk an investment of $797-million in Citicorp.

Any investor acquiring 10% or more of a US bank needs approval from the Fed. This legislation did not prevent Saudis from fronting for the crooked Bank of Credit and Commerce International in its illegal purchase of First American Bank shares in 1982.

At the end of 1991, after a temporary waiver, the prince filed an application regarding his 14.9% stake in Citicorp. Most such applications are approved within 60 days, but after 14 months, the Fed had still not given him the go-ahead. In 1993, the prince says, he "got the message" and withdrew his application, selling enough shares to bring his holding in Citicorp below the 10% threshold. Those shares would be worth $1.8-billion today, but the prince sold them before Citicorp's value really took off, and he raised only $364-million.

The Fed is the only regulatory body ever to have publicly investigated Prince Alwaleed. It will not comment on why it did not approve his application. However, the prince looks to have been a forced seller. He himself acknowledges that he "had to play by the rules in America". When he sold, he disposed of the absolute minimum number of shares required by law.

Citicorp was only the beginning. Since 1990 the prince's empire has consumed roughly $4.5-billion. The prince rarely sells any investments and has denied that his wealth is inherited or a gift. Where has it come from? His possible sources of money are a) funds managed for others; b) borrowings; c) investment income; and d) trading.

In filings to regulators, Prince Alwaleed has declared that the money he has invested is his own. What about borrowing? When buying hotels, the prince has sometimes borrowed against the building he is purchasing - whatever his need for cash, this reduces his tax bill. At least once, he has also used shareholdings as collateral to buy shares. However, the prince insists that he avoids debt, and his declarations to US regulators confirm this.

That leaves dividends and trading as Prince Alwaleed's chief sources of cash. His investments outside Saudi Arabia reflect a desire to maximise long-term capital growth, rather than dividend yield. That is why his quoted international investments yielded only $108-million last year, and his $1-billion war chest, $50-million.

His unlisted international ventures yielded only a further $35-million or so. The prince has invested in an Arab satellite-television network and Teledesic, an ambitious telecoms project, neither of which is yet paying dividends. He also owns property and hotels. But the prince does not receive much income from these - like most hoteliers, his profits will come in the form of capital gains. And, far from being a seller, Prince Alwaleed has been investing.

That leaves the prince's businesses and investments in Saudi Arabia. He owns stakes in three main quoted businesses, a bank, a food-industry conglomerate and a venture-capital outfit. But these are relatively small investments and, all told, yielded $30-million last year.

What does all this amount to? The prince puts his total assets at $14.3-billion. His investments outside Saudi Arabia are worth $11-billion. He has quoted investments in Saudi Arabia worth roughly a further $700-million. And he has $1.1-billion of cash. This total of $12.8-billion of assets earned Prince Alwaleed $223-million.

Really? The prince estimates that his investment income was $500-million last year. So his remaining assets, worth only $1.5-billion, just over a tenth of the total, earned $277-million, over half of his income. And that is not all. Roughly $550-million's worth of private Saudi assets, including his palace, aeroplanes and yacht, do not produce any income. Neither do other assets, such as three unfinished property developments.

Most assets have a cash yield of a few percent, yet Prince Alwaleed makes $277-million from assets to which he attributes almost no value. This does not make sense: like most well-known billionaires, Prince Alwaleed is not a man to underestimate the size of his fortune. The prince explains that he makes money as a Saudi agent for foreign firms and by trading land, most of it in and around Riyadh. But, in the normal run of business, agents do not make such sums. And the prince himself says that the property market in Riyadh last year was poor. In November 1998, in the prospectus to his largest property development, the Kingdom Centre, the prince acknowledges that "the real-estate sector in Riyadh has been depressed for several years".

The inescapable conclusion is that estimates the prince has given to The Economist and several other publications are wrong. Either the prince has a valuable and unrevealed source of income, or his income is much less than $500-million.

What about previous years? In addition to his net investment of $2.5-billion in quoted shares outside Saudi Arabia during the 1990s, the prince's projects include hotels; Canary Wharf in London; and telecoms and television ventures. Though hard to quantify precisely, these amount to another $1-billion. Prince Alwaleed has $1-billion in cash at any time and says he gives $100-million a year to charity.

In short, the prince has had roughly $5.5-billion to spend in the 1990s. But this exceeds his identifiable investment income in those years. The prince explains that much of the remaining money - which The Economist estimates amounts to at least $1.5-billion - was made in the mid-to-late 1980s, again through buying and selling land. There are no public records of these astonishing deals, and the prince does not give examples from that era. Yet chartered surveyors who were working in the Middle East between 1986 and the Gulf war say the market was "flat" throughout that period.

There is another curiosity too. The prince relishes publicity. Yet he became known in Saudi Arabia only in 1988, when he bought a stake in United Saudi Commercial Bank, which cost him a mere $10-million. Until then, the man who was pulling off land deals worth billions of dollars, remained, in his own words, "barely a blip on the radar".

Whatever the history of the prince's land deals, there may be problems ahead. He says it is hard to make money trading land these days. If so, the cash engine that has driven both his expansion and his growing fame is exhausted. Perhaps that is why a brilliant short-term property trader has become an average long-term stock market investor. It may also explain why the prince has not made any large investments in the past ten months, and why he has sought partners to help bear the cost of various Middle East schemes.

More than just Prince Alwaleed's personal fortune is at stake. Saudi royalty needs its heroes. The family is secretive, venal and backward: in Prince Alwaleed the world sees a man who is open, intelligent and successful. Yet the prince gives inconsistent figures for his earnings and assets - the two basic measures of his success. Anyone who seeks to present Prince Alwaleed as the face of the new Saudi Arabia needs to explain the mystery that lies at the heart of his empire. - © The Economist Newspaper Ltd, London 1999
loosecannon

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07/14/2008 09:51 PM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
The end isn't nigh.

There are 8500 banks in the US, if ten biggees fail the world doesn't end.

If 1000 fail wake me up.

747 failed in the S & L crisis

"The U.S. Savings and Loan crisis of the 1980s and 1990s was the failure of 747 savings and loan associations (S&L's) in the United States. The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts-- [1], which contributed to the large budget deficits of the early 1990s."

[link to en.wikipedia.org]

There is a much, much larger and more troubling danger brewing in a runaway contraction.
WW RAUPP

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07/15/2008 03:37 AM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
Some people like to make a connection with the 1930s. I believe that whole comparison is totally wrong. Why?

In the 1930s banks collapsed but a single US government action saved all banks and prevented further bank runs. The USA was taken off the gold standard so the liquidity window could be thrown open. Today, we can't throw the discount window further open. I mean, if banks have access to billions and billions in funds against zero interest (in real terms) and yet there are still problems: there is one conclusion. Here were are faced, if things fall apart, with a system crisis.

That was never the case in 1929-1939 compared to present day financial woes.
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loosecannon

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07/15/2008 11:45 AM
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Re: Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
Some people like to make a connection with the 1930s. I believe that whole comparison is totally wrong. Why?

In the 1930s banks collapsed but a single US government action saved all banks and prevented further bank runs. The USA was taken off the gold standard so the liquidity window could be thrown open. Today, we can't throw the discount window further open. I mean, if banks have access to billions and billions in funds against zero interest (in real terms) and yet there are still problems: there is one conclusion. Here were are faced, if things fall apart, with a system crisis.

That was never the case in 1929-1939 compared to present day financial woes.
 Quoting: WW RAUPP


Well for a start the bank runs were not the cause of the intractible depression of 29. The shrinking money supply was.

The problem today is that banks no longer honor one another's commerical paper and the lending rates are shrinking despite the fact that the fed is throwing the discount window wide open.

So the money supply shrinks. And regardless of all other factors money supply and money velocity are direct limiters of economic potential. Or GDP.

The systemic crisis of today is likely of the exact same nature as in 29.

We have no means to introduce capital into circulation except via bank lending. And as loans are paid dollars continually dissappear from circulation. So a % of new debt/GDP is essential to maintain the system. Rioght now that new debt is lagging.

It's a shitty system, but it's the one we have. And if it creates a runaway money supply contraction or a credit contraction we are in dire straights.