Brave Face Masks Bold Lie: Questions For Citi's Chuck Prince

The Herald Tribune is reporting JPMorgan Chase, Bank of America and Wachovia join Citi in borrowing $500M each from Fed.

Four major banks said Wednesday they each borrowed $500 million (€370.5 million) from the Federal Reserve's discount window, lending weight to its efforts to restore liquidity to tight markets.

Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wachovia Corp. (WB) each stressed they themselves have "substantial liquidity" and the ability to borrow money elsewhere.
In a joint statement, the latter three said they decided to borrow directly from the central bank to demonstrate "the potential value of the Fed's primary credit facility" and encourage its use by other banks. It was not clear if other banks had also decided to borrow from the Fed.
Citigroup was the first to announce its decision to borrow the money, "on behalf of its clients" at Citibank.

"Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients," the company said. "Citibank stands ready to continue to access the discount window as client needs and market conditions warrant."

It was followed minutes later by the three other banks.

"The companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions," their statement said. The three added that they hoped their actions would "promote broad acceptance of the use of the facility."

This is either blatant stupidity or a bold face lie. I believe the latter. How can one "restore liquidity" by borrowing money that one supposedly does not need? The statement makes no sense.

As for Citigroup, what exactly does borrowing money "on behalf of its clients" mean? What clients? Who is in trouble here?

By making this look like a respectable thing to do (it's not), it likely covers up the likely fact that someone is in trouble. Inquiring minds might no be saying "Mish, you are talking conspiracy". Of course I am. But like most conspiracies this one is in plain sight. We simply do not have all the i's dotted and t's crossed in regards to the details.

A well respected source whose opinion I respect offered this viewpoint anonymously: "Basically this is a PR move coordinated by Fed to hide the fact that going to window is emergency move. It hides the fact that some banks have to."

Mr. Practical Chimes In

Minyanville's Mr. Practical had this to say:

"When a bank borrows from the discount window, that normally means they have no alternative for funds. Borrowing directly from the Fed in this way is more expensive and cuts into margins.

If Citi really needs that liquidity it is very negative. If they do not then what is the reason for doing so?

Perhaps psychologically the Fed is asking them to so that others that do it don't look so bad. Whatever is happening is highly unusual. Do not let market pundits tell you otherwise"

Minyanville's Todd Harrison had this to say in Bullets Over Broadway: The Street Taps the Discount Window:

While you were sleeping. Citigroup (C) has announced that they've tapped the Fed Discount Window for $500 bananas on behalf of its clients. Again, be wary of a cornered animal (they've got sharp claws) but add it to the list of things that make you go hmmm…

Hey now, so did JP Morgan, BankAmerica, Wachovia … y'all think that they got a phone call from Hank & Ben?

Professor John Succo on today's Buzz: "There is a huge dichotomy in the marketplace. On one hand, the market in general is being bid back up while government officials try to reassure investors as to the soundness of the financial system. Some of the same officials that originally didn't see a problem.

On the other, investors are paying prices in options on bank stocks and other financials that indicate bankruptcy. We can't have both.

This is not a 'wall of worry'. I have never seen option prices this high in big capitalization financial companies. Take what you want from that. Either the stock market in general is going to correct massively, or the buyers of this protection are really making a mistake."

My friend "Trotsky" offered the following opinion about options pricing: "The options market is acting quite rationally." The implication is that something big is coming down the pike even if we do not know exactly what it is.

For now anyway, the market is once again climbing a "wall of complacency" as opposed to a "wall of worry" as some cheerleaders seem to think. How much longer this lasts is of course a guess. But my guess is "not much".

But let's return to the lead article for one more look at something: "Three [banks] said they decided to borrow directly from the central bank to demonstrate 'the potential value of the Fed's primary credit facility' and encourage its use by other banks."

The idea of no one wanting to borrow is of course mistakenly viewed as an "ominous threat". The real threat of course is if foolish lending and foolish borrowing continues unabated.

But my how quickly we have gone from Chuck Prince Citigroup CEO saying No End Soon to Buyout Boom: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing" to several major banks borrowing money they supposedly do not need in a foolish effort to "encourage" others banks to do so as well.

Questions for Chuck Prince

• Have you stopped dancing yet?
• Why are you borrowing money for clients at 5.75% when the Fed Fund's rate hit 4.5% today and in theory you could have got it close to that?
• Exactly how is paying 1.25% too much for money benefiting either you or your clients?

Comments

[aerius]

Total shot in the dark, but it seems like Ben gave them a call and asked them to take out some money to try to remove some of the negative stigma of borrowing from the central bank. This way if things do get worse and banks need to borrow for real, investors won't panic since 'last time they borrowed it was ok.' Getting the largest banks to all do it also lets the little guys know they can borrow as well with no repercussions.

A 1.25% spread on 500 million is nothing to these big guys.