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Friday, December 14, 2007

Citigroup Rescues SIVs With $58 Billion Debt Bailout (Update1)



Is this $58 BILLION Debt Bailout in the best interest of the Citigroup's shareholders? Are Citigroup action's actually preventing a meltdown in the capital markets or delaying the inevitable, which down the road could be a far bigger problem. I'm afraid that no matter how massive the bailout funds amount to...the bigger the bailout warchest, the consequences and side effects could result in a equal or even more powerful effect in the opposit direction.

Harry


Citigroup Rescues SIVs With $58 Billion Debt Bailout (Update1)

$58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.

Citigroup follows HSBC Holdings Plc, Societe Generale SA and WestLB AG in bailing out SIVs to avert fire sales of assets. The funds, which sell short-term debt and invest the proceeds in higher-yielding securities, have cut their holdings by more than 25 percent since August to $298 billion, according to Moody's. The decline may reduce the urgency for a bailout sponsored by the U.S. Treasury, Citigroup, Bank of America Corp. and JPMorgan Chase & Co.

Ratings Cut

Moody's lowered Citigroup's credit rating to Aa3, the fourth-highest level, from Aa2 late yesterday. The bank will probably ``take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations, Moody's Senior Vice President Sean Jones said in a statement.

``Citigroup's weak earnings should prohibit the bank from rapidly restoring weak capital ratios,'' which may lead to further downgrades, Jones said.

SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record high defaults on subprime mortgages. Financial institutions have since reported more than $70 billion of losses and writedowns. Citigroup invented SIVs in 1998 and was the biggest manager of the funds.

The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody's. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt. Moody's said Nov. 30 that it may cut the credit ratings on $105 billion of SIV debt.

Source Here.

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