Less Than Meets The Eye at Citigroup, Goldman

Bloomberg is reporting Citigroup May Sell $12 Billion of Loans.

Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said.

A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets.

Citigroup plunged 19 percent in New York trading this year, partly on concern that writedowns of leveraged loans, which currently trade at about 90 cents on the dollar, might add to $24 billion of losses the bank has taken so far on mortgages and bonds that tumbled in value. Chief Executive Officer Vikram Pandit is shedding high-risk holdings to shore up capital.

"As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans," said William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc., which oversees about $80 million, including about 66,000 Citigroup shares. "There's now a consortium of private-equity firms saying what they're worth."

Less Than Meets The Eye

William B. Smith needs to get his facts straight. Minyanville's Mr. Practical can help. Let's tune in to what Mr. P. has to say.

As investors bid up the Citigroup (C) stock price early on the news that the bank sold $12 billion of bad loans at not too much of a discount, perhaps they should look closer at the deal.

In order to get that price, C had to agree to indemnify the buyers of the first 20% of losses.

Citi obviously did the deal at this artificial price so that it would not have to mark down too significantly the rest of its portfolio. Not to let facts get in the way, but the price it sold the loans at, if you include the indemnification, is very poor.

Risk is high and growing.

Level 3 Assets Jump at Goldman

Bloomberg is reporting Goldman Sachs Level 3 Assets Jump, Exceeding Rivals.

Goldman Sachs Group Inc., the most profitable securities firm, reported an increase in harder-to-value assets during the first quarter, exceeding those at Morgan Stanley and Lehman Brothers Holdings Inc.

Goldman's share of Level 3 assets surged 39 percent to $96.4 billion at the end of February from $69.2 billion in November, according to a filing with the U.S. Securities and Exchange Commission today. The ratio of Level 3 to total assets rose to 8.1 percent from 6.2 percent.

While many subprime-related stakes that lost almost 100 percent of their value since July were categorized in Level 3, other holdings such as private-equity stakes, real estate and rarely traded corporate debt are also included because market prices for them aren't available. More assets have become difficult to value in the last three months as investors shunned a wider array of credit, reducing trading.

Goldman Chief Financial Officer David Viniar said last month the Level 3-to-assets ratio had risen to about 8 percent mostly because some assets classified as Level 2, including commercial real estate loans, dropped to Level 3. The biggest increase in the hard-to-value category was a 59 percent jump in derivative contracts, according to today's filing. Mortgage and other asset-backed loans and securities increased 56 percent in the quarter.

"Just because an asset is defined as Level 3 doesn't mean we're uncomfortable with the value of the asset," said Lucas van Praag, a spokesman for Goldman Sachs.

That's an interesting way of putting it. Why not just say whether or not you are comfortable to make things clear? And while you are at it, why don't you explain why have a price on commercial real estate loans last quarter but not this quarter?

Level 3 Assets At Goldman (GS), Lehman (LEH), Morgan Stanley (MS)

Stripping out stakes owned by others, Goldman's "exposure" to Level 3 assets was $82.3 billion, or 6.9 percent of the firm's total assets. That amounts to a 50 percent increase from the previous quarter. Goldman is the only one of the three banks that reports such an adjusted Level 3 figure.

Firm      Level 3      Level 3     Change From
          Assets     as %age of     Previous
        (Billions)   Total Assets    Quarter                                          From Previous

Goldman
Sachs         $96.39      8.1%         39%
excluding
some assets   $82.32      6.9%         50%

Morgan
Stanley       $78.16      7.2%        6.1%

Lehman
Brothers      $42.51      5.4%        1.3%

Things are less than meets the eye at Citigroup and Goldman. Things are also less than meets the eye at WaMu (WM) as well. See WaMu Raises Cash, Skeptical Eyebrows for more details.

In fact, one can dig into the financials of nearly any financial company now and find things that are less than meets the eye. What this all boils down to is this: Stockholders have been cheering optical illusions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List