Saturday, May 10, 2008

Well, this is ugly!

By Carl

I guess you can add this to the Big Shitpile, as my buddy
Blogenfreude likes to call it:

US banking giant Citigroup has said it wants to sell $400bn (£205bn) of assets over the next three years as part of its bid to return to profit.

It has $500bn of "legacy assets" that it wants to reduce to $100bn.

(ed. note: term of art: "legacy assets" = bad loans and investments)

For the largest bank in America, if not the world, to write off $400 billion dollars (roughly the GDP of Indonesia) is a serious blow to any "economic stimulus" the Fed rate cuts have provided. To make up for this slashing, Citigroup will likely have to cut jobs, raise fees and find new sources of income (read that as:
dip deeper into your pocket). Particularly in light of the fact they've lost $15 billion in the last six months, and probably will post a loss for the second quarter again (even allowing for this announcement), this does not bode well for the American economy.

We need only
look to Japan in the late 80s and early 90s for a lesson in this scenario: overvalued real estate creating speculative purchases creating a banking crisis (Shinsei Bank, I should disclose, is a holding of mine through a private equity venture, and is only getting back on its feet now) creating economic stagnation despite an equivalent prime lending rate of zero percent.

When your government is practically *giving* you money and your economy can't stir itself, that's a deep, deep depression.

A trailing economic indicator of any recession is the stock market indices. In Japan's case, a recession that began in 1989 didn't bottom out in the Nikkei until 2003.

Keep that in mind, since economists and Republicans tout the S&P 500 or the Dow as a marvel of the American economic engine.

Will we be hit as bad as this? Probably not. The American economy is more globally oriented today than the Japanese economy was in the 90s, altho the Japanese had strengths that America never really implemented (the
keiretsu), and the real estate bubble doesn't seem to have affected commercial real estate here, as it did in Japan.

But make no mistake: the warning signs from Japan should be heeded.

(crossposted to
Simply Left Behind)

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