Today's Best Links

I am going to try a new format for now since my posting has declined dramatically. Lots more posts showing interesting links. Fewer but more meaningful written articles. We'll see how this goes and we will probably reorganize a bit over time.

Recession is now inevitable (Roubini)

The last shoe to drop for recession (Roubini, more recent) Financial implications of Software as a Service From Paul Kedrosky.

Putting Privilege into Perspective (WSJ)

Option ARM map of misery (Businessweek) We've shown it before. Just a reminder to look at California!

Auto sales decline (Calculated Risk)

Corporate Defaults to rise (no-kidding!) (Calculated Risk)

Consumer Delinquencies Highest since last recession (Calculated Risk)

Marsh to reorganize (long needed, stock languishing but great underlying asset in insurance brokerage) From NY Times Company Announcement

Economists looking for a bunker to hide in (WSJ econ blog)

Deals not closing (what a surprise)!

Financial Innovation Strikes Again

Henry Blodget on E-Trade First Posting

Mortgage Continued: Alwaweed on Prince

I know we are running a little late on current events, but life has been a bit busy. Anyway, it is always interesting when Alwaleed gets annoyed. He waits, waits, waits and then look out. From Fortune.

Prince Alwaleed: Let me tell you the facts. Basically when Citigroup pre-announced the $6.4 billion writeoff, Chuck Prince called me within five minutes of the announcement and informed me of that loss and I told him bluntly and openly, "Is this the end of the story? Did you think of everything?"

His answer was "yes" and he expected normalization in the fourth quarter. I listened to the analyst discussion he had with everybody else and he said there would be normalization in the fourth quarter. So obviously, this gave me comfort that this was a onetime event and only an aberration and I backed off.

Although the writeoff said $6.4 billion, post-tax $3.4 billion, if you compare this to the equity of Citibank and the profits of Citibank in the third quarter, there was a $2.4 billion profit. So it was a hiccup assuming that this was a onetime event. But what happened two or three weeks later, another $8 to $11 billion additional write-off, the situation changed completely.

You cannot come to the public and say that this normalization is expected in the fourth quarter and then three weeks later, not three months later, you come and say there is an $11 billion writeoff. This is unacceptable. That's when the events changed completely. My backing was withdrawn dramatically. You should never commit to something that you can't deliver. Never.

More

Q: Are you disappointed in Chuck Prince?

A: I am extremely disappointed with Chuck Prince and I believe that Chuck Prince let down the shareholders completely. Citibank did not conduct itself in the right way. The risk-management situation was very wrong at Citibank.

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Q: Was Chuck Prince not going resign without [pressure]?

A: The impression I had is that he was not going to resign at all.

Q: Did Chuck Prince ever offer his resignation to you?

A: No, he did not.

Q: Did you like Chuck Prince?

A: Yes, Chuck Prince was a good man. Honest man. Decent man.

Great Moments in Negotiation: The Liquidity Put

From Fortune. Bolding is mine. Leaving aside the point that taking these CDOs off balance sheet was probably a sham transaction by accounting standards, why would you ever agree to this term? Heads you win; tails I lose.

At bottom, the countdown to both Prince's exit and Citi's November shocks began in that summer crisis period for the credit markets. Citi started then to have ominous dealings with CDOs that carried a "liquidity put." Never heard of a liquidity put? Google will give you a few uninformative references. But it is testimony to the obscurity of this term that Rubin says he had never heard of liquidity puts until they started harassing Citi last summer.

What Citi did a couple of years ago was insert a put type of option into otherwise conventional CDOs that were backed by subprime mortgages and sold to such entities as funds set up by Wall Street firms. The put allowed any buyer of these CDOs who ran into financing problems to sell them back - at original value - to Citi. The likelihood of the put being exercised, however, was regarded as extremely remote because the CDOs were structured to be high-grade entities called "super-senior."

Meanwhile, you might think the existence of the put would make it impossible for Citi to get those CDOs entirely off its balance sheet. But in fact Citi found a complex accounting rationale for doing exactly that, and the CDOs jumped entirely to somebody else's balance sheet. All that remained in Citi's realm was this sticky little matter of the puts - which, as we shall immediately see, ultimately worked to get these CDOs right back to their creator, Citi.