Wednesday, January 14, 2009

The clearing price of cancer

Judging by the price action today it would appear that folks have come to the conclusion that price discovery might be applied to Citi.

Well it's about bloody time.

The problem with the thesis of 'the banksters are too broke to go bankrupt' is that the longer it takes you to liquidate the capital structure of insolvent banks the more probable the chances are that you'll end up liquidating a good portion of the rest of the economy.

If we no longer have to imagine, as just one example, what the ~670 billion of off balance sheet mortgage related securities at Citi are worth and in fact, say with a transfer to a 'bad bank', get the true value and the requisite writedowns, the clearing price can be realized and applied to the industry as a whole.

After Citi all eyes will go to JP Morgan, the derivatives king where the trading book is short duration like Citi and full of the same type of junk.

As posted on November 30th : JP Morgan (with a credit derivatives book of 9.2 trillion) is on one side or another of one out of every six contracts ...It has counterparty risk on the contracts it has bought, even with collateral and faces losses on the contracts it has sold.' - Henny Sender

Equity is the first loss tranche, what is the value of Citi commons? ZERO. What is the value of JP Morgan commons? ZERO.

The hope is that with the government's hand all the way up Citi's back, we can show the proper clearing price for the cancer and start movin' on from there....

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