Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Monday, February 25, 2008 10:29 PM

Meridith Whitney of OPCO has struck again. She feels (and ignore her at your own risk in that she has been so right) that Citi has a lot of writeoffs yet ahead of itself in the CDO market, the leveraged loan market (loans made to finance buyouts that they still have on their books), and in consumer credit. If so,she says C will have to sell up to $100 billion in assets to reliquify its balance sheet and bring much needed cash back onto its books. The problem is, of course, in times like this the only stuff you can sell is the good stuff, which you would much rather keep.

The question that pops up is if Citi is in such a precarious state, what is it doing providing a back up to inject capital into the troubled bond insurance business? The answer is deceptively simple. If Citi and/or a group of banks underwrite a several billion "bailout" of the monolines, the insurers keep their AAA rated credit. Without that, tens of billions of bonds, mostly subprime mortgage things,the banks now hold would have to be written down and the resulting mark-to-market loss would total far more than the money needed to bail out the insurer.

The state regulatory bodies know this and their job is to regulate the insurer, not the bank. To protect the integrity of the AAA that is used by many municipalities to issue debt at lower interest costs than without it, the regulators have threatened to make the insurer break themselves up into two pieces. One Newco would do the traditional muni bond insurance, and the other would "guarantee" the toxic waste. Without the cash flow from the stable muni business, no one can accurately guess the worth of Newco-B's guarantee. Clever, hard ball, but clever.