Citi announced on Sunday night it was currently facing writedowns of between $8bn and $11bn, on top of the dismal numbers already reported in its Q3 statement.
What is truly shocking, however, is the speed at which these losses have been realised. Barely a month ago, Citi’s pre-Q3 trading statement, warned that it expected to realise $1.3bn on subprime-related writedowns. Which means that figure has now increased at least sixfold. To put it another way, on average Citi’s subprime-linked assets lost more that $2bn in value each week.
Citi has now disclosed it’s estimated total subprime exposure. Of the $55bn total, some $11.7bn is in its lending and structuring business and a staggering $43bn lies in exposures to collateralized debt obligations (CDOs) - huge baskets of mortgage securities.
CDOs have seen prices crash in the past two weeks, as rating agencies have slashed ratings on hundreds of mortgage backed securities. As FT Alphaville reported last week, banks could be expected to reveal more writedowns as the market tanked. The TABX tracker is a useful proxy for CDO prices. Here’s where things stood on Friday:
Of the $11.7bn subprime exposure Citi estimates it has in its lending and structuring business, $2.7bn lies in a “warehouse inventory” of unsold CDOs, $4.2bn in actively managed subprime loans intended for securitization and $4.8bn in financing transactions which have subprime collateral.
Of the remaining $43bn exposure, Citi estimates it has $18bn in CDOs: $10bn of which is in high grade tranches, almost $8bn in mezzanine tranches and some $200m in CDO squared structures. The remaining $25bn, says Citi, is in exposure to subprime CDOs through their commercial paper.
And the outlook? By sin of omission it seems clear Citi expect things to worsen before they improve:
Citi expects that market conditions will continue to evolve, and that the fair value of Citi’s positions will frequently change. Given these anticipated fluctuations, Citi does not intend to update the information provided in this release until it announces its fourth quarter 2007 earnings in January 2008.
