- May 25, 2002
- Professional Status
- Certified Residential Appraiser
Ben Bernanke, meet Gary Crittenden. While you’re easing credit, he is tightening it.
Citi and its rivals are reacting to a period when credit standards were very loose, and many poor loans were made, leading to the current round of multibillion-dollar write-offs.
One measure of that came in a detail of the write-downs Citi announced. At the end of September, it put the value of some mortgage securities it owned at $2.7 billion. It had purchased those securities intending to repackage them as part of collateralized debt obligations and sell securities in the C.D.O.’s to investors.
The collapse of the C.D.O. market made such sales impossible, and Citi still owns the securities. But it has decided they are worth about 5 percent of what they had been, and has taken a write-down of $2.6 billion.
The write-downs taken by Citi, and by some rivals, are based on assumptions about how bad the mortgage and home-price problem will become. If those assumptions turn out to be too pessimistic, then the assets written down Tuesday will turn out to have greater value.
On the other hand, if the assumptions are too optimistic, more write-downs may come.
Many of the assumptions were not disclosed, but Mr. Crittenden did say that Citi was assuming that home prices would decline 6.5 percent to 7 percent in 2008, and by a similar amount in 2009. He did not say what Citi was assuming for later years.
Citi’s shares fell $2.12, to $26.94, a 7.3 percent loss that left the price less than half its level of a year ago.
That is bad news for investors for a reason other than the obvious one. The company plans to raise $14.5 billion by selling convertible preferred stock, with a 7 percent annual coupon. Of that, $2 billion will go to the public and the rest to a group of investors, including the government of Singapore and Sanford I. Weill, Citi’s former chief executive.
The conversion price of that new issue is to be 20 percent over the market price of Citi stock, but Citi refused to say over what period the market price would be calculated. The lower the price, the more dilution will be produced for existing shareholders.