Citigroup vs. Merrill Lynch: A Neck-and-Neck Race for the Biggest Losses of All Time

While Merrill Lynch’s massive $8.4 billion asset write-down and release of long time CEO Stan O’Neal may have been last week’s big story, Citigroup captured headlines this week by publicly declaring that in addition to the $6.5 billion write-down for the third quarter, it expects to write-off the balance sheet a total of $11 billion before the year’s end. With the deployment of the awful news, Citigroup’s board of directors appropriately dismissed CEO Charles Prince (seen at right). After searching through related blogs, it is apparent that expectations for the future are far grimmer than analysts predicted this past summer. The subprime mortgage crisis, which was once viewed by skeptics as unlikely, is now approximated by some to be just the tip of the iceberg, with the true meltdown expected by mid-2008. If this proves accurate, Citigroup and Merrill will not be the only holders of subprime debt to feel the wrath of a careless and unmonitored system

Article 1: Memo to Citigroup and Merrill: It’s time to kill the financial supermarket

This is a classic case of how hindsight is always 20-20. Merrill Lynch and Citigroup are merely the first of many large, conglomerated or “supermarket” firms that will suffer from the poor lending practices and exaggerated market appreciation in the early part of the millennium. As noted on Bloomberg, the exposure of bad debt from subprime loans soaking up massive amounts of capital on companies’ balance sheets is the manifestation of poor risk-awareness by these massive firms as well as by the mortgage brokerages. That said, however, the “credit-crunch” is not the result caused by the amalgamation of different financial sectors under one corporate name, but rather, it is the result of lax and ill-considered lending practices by mortgage originators. Admittedly, the blame is, in turn, transferred to the major banks such as Merrill and Citigroup for not performing sufficient due-diligence on the mortgages they were buying, packaging, and selling to investors as CDOs and the like. That said, however, I certainly disagree with the assertion that former Citigroup CEO Sandy Weill (seen at right) is to blame for the subprime meltdown two and half decades after he introduced the financial supermarket. While having various financial sectors combined under one roof may “link” a firm’s banking sector with its investing or lending sector, there is little if any documentation to prove that is actually counterintuitive to a firm’s profitability (which is good for both investors and the firm). Finally, I would argue that if anything, there would be a significantly greater amount of positive synergies arising from the linkage of various financial sectors under one roof due to enhanced communication channels and a uniform corporate vision with intertwined interests and goals. Not to mention that if every big bank were to sell off its individual business units there would in all likelihood be far more units for sale than potential buyers.

Article 2: Poll Shows America Does Not Support Federal Intervention in Sub-Prime Mortgages: FreedomWorks poll shows 62 percent believe individuals should take responsibility

First of all, without regards to this poll in particular, it should be known that polls can be manipulated to show a statistic that favors the agenda of whomever is doing the polling.

That said, the poll used in this article is nevertheless pertinent and indicative of at the very least a minority opinion. The sheer problem with this poll, in my opinion, is that the statistic views federal intervention and federal legislation as synonymous. Currently, the American economy is standing on the edge of a very big cliff caused by the roughly $370 billion worth of outstanding bad subprime debt. As stated in the Money Times, the majority of this debt will be resetting over the next year at a monthly rate twice that of this past year (400,000 mortgages/mo rather than 200,000/mo.). This is why the Citigroup’s and the Merrill’s are suffering so perilously, and this is why the Fed cut interest rates for a second month in a row. Too many Americans bought a house in the last couple years and cannot afford their adjustable mortgages once they reset to a higher rate, while at the same time he or she cannot afford to get out of it (that is, pay off the debt portion of their home since their home's equity decreased significantly as home prices fell over the past several months). This is why federal spending must be increased to provide subsidized mortgages to those who are currently being evicted from their homes and to those lenders whose companies stand at the mercy of the subprime market. This oil spill of a problem the economy has on its hands will continue to spill into other sectors; according to MSNBC, auto sales will slow inversely to the number of mortgages that are defaulting. Also, according to Kiplinger, consumer spending will also be aversely effected as households’ discretionary income is sucked up by their increased house payments. I agree that federal legislation dictating regulations on financial firms’ practices is extreme and not appropriate for the situation on hand. In order for the markets to recover, however, the government must aid the consumers AND the lenders as both continue to feel the negative effects of this credit-crunch.