Citigroup: Matters Get Worse

Citigroup's Chuck Prince resigned as CEO, after the board scheduled a emergency meeting over the weekend to consider his fate. It was inevitable that Prince, who had faced heavy criticism prior to the Great Subprime Meltdown of 2007 got started, would face the guillotine after Citi reported large subprime and bridge loan related losses.

With O'Neal and Prince both fired, I'd expect both companies to announce further losses. The new CEOs will want as clean a slate as possible. Really any company with subprime holdings should come clean now, since the market is punishing their stock anyway. Unfortunately, it doesn't look like Citi went this route, and we'll just have to wait and see who else might also be sitting on additional losses.

Meanwhile, reports that Citi has more losses ($5-7 billion) to report is roiling the markets this morning. I'm working on a post which will show that holding subprime exposure through a CDO is far more dangerous that holding a subprime loan directly. I believe that's one reason why bond insurers are trading weaker in the CDS market than banks with larger direct subprime exposure. There could be some interesting consequences to this fact: we may see more subprime losses turn up at traditional insurance companies. P&C Insurance companies love high-quality shorter duration assets. There is a good chance that some insurance company loaded up on ABS CDOs, which were the highest-yielding among highly rated, short-duration assets during most of 2005-2007.

This is starting to feel more and more like 2001. After Enron and Worldcom, there was a mad dash to find who else might be tainted with poor earnings quality. Many companies who were guilty of aggressive accounting tried to quietly mend their ways, only to get pummelled by the market. Today's search for subprime losses feels very similar. The only question is will be get an Enron-sized default to complete the metaphor?