Citi slamming the door on withdraws

[Aaron Copland]

Here is what I don't understand, this article states Citi has trillions in assests. So why is it halting withdraws on a 500 million CSO partners fund. Makes no since something is wrong here.----------------------------------------------------------------------------------------------------------------------------------------------------------------------------


Citigroup suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to yank more than 30% of the fund's roughly $500 million in assets. To stabilize the fund, which had an 11% loss last year, Citigroup last month injected $100 million. The fund's longtime manager, John Pickett, has left, following a bitter dispute with Citigroup executives and complaints from investors that he put too much money into a single investment that went bad.

Alternative-investment products such as hedge funds are a relatively small business for Citigroup, which has about $2.4 trillion in assets. Citigroup's more than 80 alternative products held $61.9 billion in assets as of Sept. 30, of which about $11.5 billion represented Citigroup's own capital.

 

[DeeDeeTwo]

The fund probably has a 200 page Partnership Agreement...
Much of it addressing special situations...
So C is just invoking a clause in the Agreement.

The funds assets have not become worthless... just illiquid.

For example...
If you are forced to sell now you might get $0.30 on the dollar...
If you can wait 6 or 12 months...
You might get $0.80 on the dollar.

The major problem is lack of liquidity...
NOT assets that have gone to zero.

 

[Aaron Copland]

Quote from DeeDeeTwo:

The fund probably has a 200 page Partnership Agreement...
Much of it addressing special situations...
So C is just invoking a clause in the Agreement.

The funds assets have not become worthless... just illiquid.

For example...
If you are forced to sell now you might get $0.30 on the dollar...
If you can wait 6 or 12 months...
You might get $0.80 on the dollar.

The major problem is lack of liquidity...
NOT assets that have gone to zero.

That would explain the -18,000,000,000 in nonborrowed reserves.

 

[ronblack]

Quote from Aaron Copland:

Here is what I don't understand, this article states Citi has trillions in assests. So why is it halting withdraws on a 500 million CSO partners fund. Makes no since something is wrong here

It is because you do not know the proper meaning of the terms used in the banking industry. "Assets" in banking are the loans and "liabilities" are the deposits.

In a very simplified way, the profit of a bank is given by:

profit = interest received on loans - interest paid on deposits

Unless you understand the meaning of terms you wll be cofused and think the end of the world is near. Banks provide security and interest on deposits but they also apply some restrictions. One restriction is that they can delay withdraws so they can find funding for the GAP.

GAP = loans - deposits ( as a function of time period)

If there is a run on deposits the bank needs to find money to finance its issued loans. It must borrow from other banks. You must understand that deposits are drawn on demand but loans are made for a fixed period of time. When you demand that a bank provides a loan to you with a fixed interest rate for a fixed period of time, the bank reserved the right to limit withdraws in time and size until it balances its books.

I think it is fair.

Ron

 

[eusdaiki]

Quote from ronblack:



profit = interest received on loans - interest paid on deposits

Not 100% accurate.

interest received on loans - interest paid on deposits = Margin for Intermediation [MFI]


Income from services provided - Cost of services provided = Margin for Services [MFS]

income for operations - cost of operations = Margin for operations [MFO]

MFI
+MFS
+MFO
= gross operational revenue
- Administrative expenses
= Net Operational revenue
+ other revenue
= Profit before fines, taxes and loss estimates.
- fines & loss estimates
= Profit before taxes.
- taxes
= Profit.

 

[athlonmank8]

Quote from Aaron Copland:

That would explain the -18,000,000,000 in nonborrowed reserves.

yeah that i'm sure you know everything about......

 

[Aaron Copland]

Quote from ronblack:

It is because you do not know the proper meaning of the terms used in the banking industry. "Assets" in banking are the loans and "liabilities" are the deposits.

In a very simplified way, the profit of a bank is given by:

profit = interest received on loans - interest paid on deposits

Unless you understand the meaning of terms you wll be cofused and think the end of the world is near. Banks provide security and interest on deposits but they also apply some restrictions. One restriction is that they can delay withdraws so they can find funding for the GAP.

GAP = loans - deposits ( as a function of time period)

If there is a run on deposits the bank needs to find money to finance its issued loans. It must borrow from other banks. You must understand that deposits are drawn on demand but loans are made for a fixed period of time. When you demand that a bank provides a loan to you with a fixed interest rate for a fixed period of time, the bank reserved the right to limit withdraws in time and size until it balances its books.

I think it is fair.

Ron

Assets are what you own. Liabilities are what you owe. Equity is what’s left over.

What am I missing here.

 

[Aaron Copland]

Quote from ronblack:

It is because you do not know the proper meaning of the terms used in the banking industry. "Assets" in banking are the loans and "liabilities" are the deposits.

In a very simplified way, the profit of a bank is given by:

profit = interest received on loans - interest paid on deposits

Unless you understand the meaning of terms you wll be cofused and think the end of the world is near. Banks provide security and interest on deposits but they also apply some restrictions. One restriction is that they can delay withdraws so they can find funding for the GAP.

GAP = loans - deposits ( as a function of time period)

If there is a run on deposits the bank needs to find money to finance its issued loans. It must borrow from other banks. You must understand that deposits are drawn on demand but loans are made for a fixed period of time. When you demand that a bank provides a loan to you with a fixed interest rate for a fixed period of time, the bank reserved the right to limit withdraws in time and size until it balances its books.

I think it is fair.

Ron

The real problem is the fractional reserve system.

 

[scriabinop23]

Quote from Aaron Copland:

The real problem is the fractional reserve system.

Congrats on learning the definition of the fractional reserve system.

The *real* problem is what banks are allowed to buy with those fractional reserves (asset = loan to customers), not necessarily the system itself.

ie giving a loan to a customer is = buying a bond (holding an asset).

buying subprime debt 20:1 (5% reserve ratio) is the problem here. (note 20:1 is an arbitrary number i picked for this)

if you merely stipulate higher reserve requirements for risky assets, correctly modelled to probable negative outcomes, you fix the problem. ie 40% reserve requirement for subprime first loans to homeowners, 90% reserve requirement for subprime home equity loan, 2-10% reserve requirement against govt treasuries, etc. this all can work. precisely why 0% down home loans to subprime borrowers were a broken concept from the beginning.

any dummy can forecast that reserve requirements should have increased as home values pulled away from their long term moving averages. risk was actually elevating as they gave more loans out. ie is your risk higher if you buy AAPL on margin for $90 or $180 when it has a fundamental value of 80? (rhetorical question: answer is risk is higher at 180).

 

[eusdaiki]

Quote from scriabinop23:


if you merely stipulate higher reserve requirements for risky assets, correctly modelled to probable negative outcomes, you fix the problem. ie 40% reserve requirement for subprime first loans to homeowners, 90% reserve requirement for subprime home equity loan, 2-10% reserve requirement against govt treasuries, etc. this all can work. precisely why 0% down home loans to subprime borrowers were a broken concept from the beginning.

That's already done by the banking system, is estipulated in the CAMELS valuation model and under the Basel II standards.
The problem is that real state is qualified as a low risk investment... back when they came up with the standard they didn't contemplate how banks could make mortgages the center of a financial storm...