The losses just keep on stacking up for Citi.
With another $12bn writedown in the offing, you might hope for a little clarity from Citi’s management. Admittedly, the bank’s 10-K, does point to new areas of concern, albeit rather elliptically:
There is a risk of a U.S. and/or global downturn in 2008. A U.S-led economic downturn could negatively impact other markets and economies around the world and could restrict the Company’s growth opportunities internationally. Should economic conditions further deteriorate, the Company could see revenue reductions across its businesses and increased costs of credit. In addition, continuing deterioration of the U.S. or global real estate markets could adversely impact the Company’s revenues, including additional write-downs of subprime and other exposures, additional write-downs of leveraged loan commitments and cost of credit, including increased credit losses in mortgage-related and other activities.
It’s interesting that Citi agree with external analysts and quite openly moot writedowns on their leveraged loan book. A disclosure European banks seem loath to go near.
Also observed from the 10-K, the Wall Street Journal notes that Citi piled up daily losses of more than $100m on 15 separate occasions. Here’s the rather dull histogram behind that stat (page 63):
What we’re curious about is that little footnote. Here’s an expansion of it:
Due to the difficulty in estimating daily profit and loss in the ABS CDO market, those trading-related revenues, including recent subprime-related losses, are not included in current VAR calculations and thus are not included in the Histogram of Daily Trading-Related Revenue.
So $39.8bn of subprime CDO assets are excluded from Citi’s trading VAR calculations. Possibly that’s excusable given the systemic and realised collateral crisis for subprime MBS.
But all the other CDO trades are excluded as well: synthetic corporate CDOs and CLOs for example, the unwinding of which has recently been sending credit indices spiralling.
Non-mortgage CDOs don’t yet warrant a detailed mention anywhere in the 10-K. The point is, those losses are not being driven by collateral issues, but by the technical factors causing the current conditions in CDS markets. Losses on synthetic ABS CDOs, CLOs and such like are pure trading losses. There’s no justification for omitting them.