Tuesday, January 13, 2009

Citibank shrinks...and shrinks....

Here is a CNN report on the incredibly shrinking Citigroup.

A many months ago, in response to a comment on my blog on the book value of Citigroup, I speculated that its book value may end up negative. It took back off balance sheet things like those SIV (Special Investment Vehicles) with alot of mortgage paper roughly $80B worth. It is not clear how much it will lose eventually but it looks like it has to keep selling assets to patch up those losses. Over the weekend, it announced that it was selling its prized assets Smith Barney to Morgan Stanley for $12B. This was seen as a desperate move by Citigroup to sell of high quality assets at this time to raise cash. Everytime it sells something it shrinks and the money raise merely offset losses from rotten assets.

How paper issued on housing loans backed by houses sink by 80%? Investigations show that there was massive fraud involved in the subprime segment. Many homes were inflated by 800%...sometimes 1000%. A person with a home worth $20K had it valued by crooked valuers at $200K, these people took out loans on their homes without any means of paying. The money is gone and the banks are left with homes that are auctioned off at a fraction of the valuation. ...the $200K home may sell at $15K. Even in the non-subprime area, some of the property is now worth 40% less than they were valued. If you take the several trillions lost in mortgage backed paper and the trillion lost in the CDOs following Lehman's collapse. There is quite a few trillion to patch up. That is why the $700B bailout which seemed like a lot of money will come in very short.

Let me digress a little....

There is a very important lesson to be learnt here. Expensive housing that take 20-30 years to pay off is not a very good idea. In Singapore, our public housing is the most expensive in the world and this has been seen as a good thing by the PAP. Even in good times the heavy burden of the housing loan is barely tolerable. ...many backs are broken by this recession and the thing that will do it is high debt due to property. For years and years, citizens have been urging the PAP govt to provide affordable housing that can be serviced without so much strain on the household. The PAP govt refused and often used its favorite argument of a "market subsidy"to justify the cost of HDB flats. However, this is a fallacious argument, the market price of a flat is influenced by the way the flat is financed and the PAP has liberalised the CPF for housing and allow mortgages to be paid over longer and longer periods. They frequently limit supply of rental flats and put rules to prevent Singaporeans from buying smaller flats..... even smaller flats are expensive. This has allowed the PAP to make huge surpluses selling flats to Singaporeans - at the expense of the citizens. This recession will unfortunately show all the flaws of what the PAP has done. Even before we get to the worse point, 8% of HDB mortgages are now in default (> 3 months). The strain on Singapore families is becoming untolerable....and it was all preventable if not for the govt's goal to accumulate billions from the citizens for housing....


oldhorse42 said...

Why are the prices of HDB still stable while the private properties have slumped?

Anonymous said...

because our garbermen is very good at making fools of rich overseas investors.

Anonymous said...

the freaking cost of hdb housing is the root cause of all the unhappiness in sg.
think abt it. if housing is affordable:
one of the parents can stay at home take care of kids,prevent them from turning bad.
u can take up a job that appeals to u instead of one that sucks but pays the rent.

the pap don't want to fix the root cause of low birth-rate. only wayang give more leave etc. hdb is too profitable for them.

Anonymous said...

The PAP MP's also amass the Sinking fund, which are nothing but exorbitant town charges they claim are used to maintain your HDB worthiness. They just want the money to go into their own pockets.

So, first they make you go into debt, then second you hand out money to their sinking fund.

Kaffein said...

If you think carefully, there are a couple of good reasons (in favour of PAP) on why the price of HDB flats are so high:

1. If HDB flats are affordable, say an average S'porean pays off after 10 years, someone (as in Emperor status) had mentioned that people will slack and not work hard for the economy. So to generate the growth and economy of S'pore, it will be of the incumbent party's interest for people to take loans of 15-20 years to continue generating income and thereby increasing the economic growth of the country. So here we are still earning income to achieve the unattainable dream and stimulating economic growth. We are not as 'slack' as the other western countries as claimed by someone.

2. Being Asians, we pride in status more so than Western countries. So having an expensive house, or car is a kind of social status for us. So many of us will choose to buy a unit instead of renting. This is our undoing and weakness. Because we have tied ourselves to 15-20 years of repayment. And so continue to contribute to the economy.

3. Having paid so much for our housing, we will have to defend for it. So another of our undoing is to serve NS to protect our capital and expensive assets.

4. With the money tied to our CPF, the government has an unpredented amount to use for investments, nation building or what-have-yous.

There are other more minor reasons.

Maybe I should get the book by CSJ "A Nation Cheated". Quite sure he would have highlighted these points already.


Anonymous said...

Agree with your post, lucky Tan.
When CPF was set up, houses were $50,000, and we could have a tidy sum amassed at 55 years old for retirement.
Work out now - flats cost $400,000, how much has salary increased? Add to it the interest cost of the flat and you need to pay $800,000 over 30 years.
There is no money left at age 55 in the CPF.
Add to that the minimum sum of $120,000 to provide a lifelong annuity. No wonder we cannot retire at 55 years old - if is now a dream only for Swiss, not Singaporeans.
And while we are told that a bad govt would result in our women working as maid by the Father, we are now told by the Son that it is honourable if our mothers now work as chambermaids in local hotels. (What a failure of a million dollar cabinet) See how the spin spins! (read feedmetothefish)

Anonymous said...

Look, in this day and age, I just don't see why people are comparing public housing in Singapore with public housing in other countries. Is it just because it's built by the government? If you take the comparison between HDB flats and private apartments in other countries, HDB flats are still far more affordable. I disagree with alot of the things the government has taken up, so much so that I've left the country for good. But HDB is one of the lifesavers. I don't agree with the restrictions on rentals, but that is a separate issues altogether. And if you compare private housing in Singapore with private housing in other countries (first world Western nations predominantly) then you can say Singapore's private housing is much more expensive. Change your perspective. Nothing much else is going to change.

Anonymous said...

nobody gives a sh*t as long as....66.6% are taken care of.

it's the justification to "kill" one third of the population.

so if you are arguing for that 1/3, you know where you belong....the dead zone!

so all these are rather ...ahem...amusing. :)

Onlooker said...

Hmmmm our very own housing/ foreclosure crisis in the making.
But basically anything (Citi included) the LKK touch literally turn to Sl-liT.
Talk about the reverse Midas touch.
Or should the term be long term investiture.
Agree:- lower HDB cost will allow the mum to stay home and make babies as in the past when Singapore is not so "selectively rich" -> note.
Problem is created by silly Policies that only benefit a few note -> Chosen ones.
IE the wealth is only enjoyed by the privileged few who like to spout brutal truths.

Anonymous said...

ST reported today that Temasek Holdings has donated S$ 500 million (ie half a BILLION) to set up a Temasek Foundation so that the latter can use those funds to play fairy-godmother and donate money to third world countries like Laos, Phillipines, etc.

Wah...Temasek Holdings is so rich ah?

Ministry of Finance must look into raising it's rate of lending funds to Temasek Holdings since the latter obviously doesnt even seem to need it. It can borrow CPF money at rates that are so cheap that it can go around and give it away for FREE.

Meanwhile, senior citizens, who have been paid paltry interests from their CPF savings dont even have enough in their CPF to retire and are encouraged to work "as long as they can".

Do the people overseas need our money more than the poor among us?

Looking at the way Temasek is spending its money, Citibank might just well be considered "small change".

Anonymous said...

Hi Lucky Tan,

The example you used for subprime is not that clear to me.

Please correct me if I'm wrong. Are you saying that the subprime has 2 categories? 1st is for first time home buyer and 2nd is for those who paid fully their houses already but still decides to take a second home loan to buy other stuffs?

For these 2 categories, then the value checkers decide to inflate the price of the houses?

Thanks for your time to explain Lucky Tan. I hope I can learn something new from this episode.


Economist with a Heart :)

Anonymous said...

"ST reported today that Temasek Holdings has donated S$ 500 million (ie half a BILLION) to set up a Temasek Foundation so that the latter can use those funds to play fairy-godmother and donate money to third world countries like Laos, Phillipines, etc."

You know why ? Because TH is doing whatever to prevent internation investigation, so to prevent to give some carrot to the world at the expense of singaporean's CPF and money.

Anonymous said...

you can't get fat pay if you don't drive prices up but you DO WANT FAT PAY so when prices go up up up all keep quiet so you salivate and feed like a PIG until you get FAT FAT

so when prices escalated to the point of cannot tahan for monkeys below and the ground monkeys start to complain of financial weight...then come some BIG FAT PIGS who eat full full already start to don the clergy robe and talk down prices.

fucking HYPOCRITICAL PIGS ought to be sent to the slaughter house before they SET MORE PEOPLE ON FIRE WITH THEIR FUCKING GREED and STUPID WAYS!

Anonymous said...

We need a good dose of bad government. So people please vote for the opposition as we all know too well what a good government can do...pay itself well.

Anonymous said...

Now that Citi, BofA, UBS are all imploding, what are the losses substained by GIC and Temasek so far?