Tuesday, January 15, 2008

More Thoughts On Foreign Cash Infusions

From Bloomberg:

Citigroup Inc. and Merrill Lynch & Co., two of America's largest financial institutions, turned to outside investors for a second time in two months to replenish capital eroded by subprime mortgage losses.

Citigroup, the biggest U.S. bank, is getting $14.5 billion from investors, including the governments of Singapore and Kuwait, former Chairman Sanford Weill, and Saudi Prince Alwaleed bin Talal, the New York-based company said today in a statement. Merrill, the largest brokerage, said it's receiving $6.6 billion from a group led by Tokyo-based Mizuho Financial Group Inc., the Kuwait Investment Authority and the Korean Investment Corp.

Wall Street banks have now received $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets. Citigroup was propped up in November by a $7.5 billion investment from the Abu Dhabi Investment Authority. New York-based Merrill was helped by a $5.6 billion cash infusion last month from Singapore's Temasek Holdings Pte. and U.S. fund manager Davis Selected Advisors LP.

``The only reason the banks are raising capital from the Middle East and Asia is because those are the only people who have the excess capital to lend,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management, which holds shares of Citigroup and Merrill.


Let's start with a basic point. US financial firms are in trouble. Estimates regarding the total amount necessary writedowns related to the housing/sub-prime mess range from $300 - $500 billion. Assuming those numbers are accurate, we have at least another $200 billion or so in writedowns to go.

In addition, financial firms aren't in a position where they can "get it over with" quickly by announcing one massive writeoff. If they did that, they would seriously erode their capital base, thus preventing them from making loans. In other words, because of the way banks work (namely the fractional reserve system) they are prevented from getting all of this over with quickly. Therefore, we are by default forced to endure a "slow bleed) methodology to deal with this mess.

What we have seen emerge is an announcement of a writedown plus an announcement of a capital infusion,, probably as a way to (hopefully) take the sting out of the announcement. (Of course, Citigroup is down 6.88% as of this writing so that really isn't going that well).

This article raises some really interesting points.

1.) There is already a ton of cash invested here. $59 billion is a lot of money.

2.) There are some countries out there with a ton of cash to invest. The oil countries and Asia (which is benefiting from currency manipulation). They are looking for a place to invest this money and have found some targets.

Something I am very surprised about is the lack of any political stances from either party during a presidential election. I would think this type of activity would be a political lightning rod right now.