I have a feeling that I might be in a minority here, possibly even a minority of one, but this looks to me to be good news:
Fears of more turmoil hitting global stock markets grew last night after it emerged that Citigroup, the world’s biggest bank, has called an emergency board meeting for this weekend amid fears of escalating bad debts.
There were concerns in New York that the Citigroup board meeting had been called to discuss the possibility of the bank writing off an increasing amount of bad debt. This could seriously hit its profits.
Citigroup’s shares have already slumped 25 per cent over the past three weeks after the bank wrote off $5·9 billion (£2·8 billion) worth of bad debts.
Much of this originally arose in the US sub-prime mortgage market, which is currently in crisis as a large number of borrowers with poor credit histories have defaulted on their repayments.
Just to lay out why I think it\’s good news. OK, so we\’ve got the sub-prime mess. It\’s not just that though, the extension of loans that are now turning sour. The way that they were sliced and diced meant that the risks were spread (good) but that no one really knows where the risk is now (bad). This has led to all sorts of attempts to cordon off such SIVs and so on from the regular markets: one was being proposed by Citigroup indeed. Throw it all into one huge fund (the Superconduit) and hope the problem goes away.
However, all of these attempts suffer from one basic problem. Someone, somewhere out there, has lost a tonne of money on investing in the tranches and slices of these sub-prime mortgages. Until that loss is crystallised, made known, we\’ll still have the fear and uncertainty in the markets. And it\’s that fear and uncertainty which we actually fear a great deal more than we do the losses.
So who is it that "should" lose the money? Well, it "should" be the shareholders in the banks that leant it actually. And if this is what Citigroup is going to do, write down the debt, take the loss, then that\’s actually what we want. The loss is crystalised, we know where it is, and we can get back to having functional credit markets again. The right people will have lost money as well.
It\’s almost as if the larger the write down the better it is in the larger scheme of things.