Thursday, November 29, 2007

Citibank raised the cost of the solution.

Is CitiBank now a junk bank based on their cost of replacing their capital?

On Monday, Citibank sold a stake in the bank for $7.5 billion dollars. They paid the investor 11% dividend for about 5 years. The bank needed to replace some of the capital they wrote down in the subprime mess. Because Citi was the first they set the benchmark for others to follow, it appears to me that Citi is either in much worse shape then they have let on, or they were had based on the cost to other banks this week. As I was speaking to a client on Wednesday I said, at the price Citi paid it now becomes a “JunkBank”.

As other banks and mortgage provides were looking to raise money they had to pay more than they thought they would have to pay. Barclays bank came to the market today with a QDP preferred at 7.75%. Freddie Mac the second largest mortgage buyer came today with a non-convertible preferred at 8.38% yield.

Citi paid 2.79 times the yield on the 10-year T Bond

IThe 10-year Treasury Bond its yield today is 3.94%. If you look at what these banks had to pay to rebuild capital, it was very expensive. Barclays paid 1.96% times the 10-year T-Bond rate and Freddie Mac paid 2.12 times the 10–year rate. On the other hand, Citi paid 2.79 times the 10-year rate.

The risk premium in the credit markets has expanded, perhaps much wider than it should be, only time and more disclosure will tell if these were in fact the right prices.

Dan Perkins

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