Ponzi Financing At Citigroup

Source: Mish's Global Economic Trend Analysis

"Citigroup is cash strapped. To raise cash it has agreed to sell $12 billion worth of leveraged loans it was holding at a reported 90 cents on the dollar. Earlier today in Less Than Meets The Eye at Citigroup, Goldman I noted that in order for Citigroup to get a price of $12 billion for the loan portfolio it sold, it had to agree to indemnify the buyers of the first 20% of losses. Tonight more details are emerging.

"Reuters is reporting Citi financing its $12 bln sale of loans.
Citigroup Inc's (C) plan to sell $12 billion of loans and bonds made to private equity firms is seen as a positive for the bank and the loan market, but the deal will leave the largest U.S. bank with exposure to those private equity firms even after the sale.

That's because Citi is financing much of the sale itself, according to a person familiar with the deal. It is lending some money to the private equity firms, which will combine it with some of their own money to purchase the debt.

Essentially, Citigroup is re-lending money, but on different terms. The new loans are obligations of the private equity firms, and Citi is selling the original loans to the firms at somewhere around 90 cents on the dollar.

After the sale, Citi would no longer have to mark down the original leveraged loans if their value falls further, a real possibility in the currently disrupted credit markets. It also allows the bank to confirm the recorded values of other leveraged loans in its portfolio."

My Comment: Exactly how does this confirm the value of anything? What this did was muddy the waters. Citi had to indemnify the buyers from the first 20% of the loss so Citi effectively got somewhere between 70 and 90 cents on the dollar for those loans. We will not know the exact amount until a later date..."

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Liquidity Traps: Myth And Reality

Source: Mish's Global Economic Analysis

"...Milton Friedman On Liquidity Traps

Indeed the current setup is essentially the liquidity trap that Japan fell into. Wikipedia has this (and much more) to say about Liquidity Traps.

'In monetary economics, a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.

Milton Friedman suggested that a monetary authority can escape a liquidity trap by bypassing financial intermediaries to give money directly to consumers or businesses. This is referred to as a money gift or as helicopter money (this latter phrase is meant to call forth the image of a central banker hovering in a helicopter, dropping suitcases full of money to individuals).

American economist Paul Krugman suggests that what was needed was a central bank commitment to steady positive monetary growth, which would encourage inflationary expectations and lower expected real interest rates, which would stimulate spending.'

Friedman Is Wrong

Milton Friedman is wrong and Japan proved it. Japan's national debt went from nowhere to 150% of GDP and they are still battling the aftermath of deflation for 18 years or more.

Artificially stimulating the economy eventually causes all sorts of problems..."

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Bubble Economy Endgame

Source: Global Economic Trend Analysis

"Boomers counting on their home as their retirement now have to worry about saving rather than spending. Social attitudes towards consumption are changing slowly but surely. Those changing attitudes are exactly why Things That "Can't" Happen, will happen.

Because each season is long, up to 25 years, by the time Winter is about to hit, it's been 75 years since there has been deflation. That length of times causes people to think deflation will never happen again. The biggest manifestation this time was the widespread belief "Home Prices Always Go Up". That belief has now been shattered. Somehow, people still believe in the Fed.

Faith In The Fed Is The Last Bubble

The last remaining bubble is faith in the Fed's ability to inflate.

"Door Number Two" was a very well written rebuttal. Unfortunately, the rebuttal was based on a strawman that does not exist. The initial flaw was that no agreement was reached on critical definitions. A major subsequent flaw is the assumption that deflationistas in general have been wrong about gold. Finally, the "Door Number Two" post shows that even after all this time the inflationistas somehow do not understand what the deflationistas have been saying, even when it is spelled out point by point."

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