In what is likely to be the shape of things to come across the board, Citigroup Posts Loss on Credit-Card Securitizations.

Aug. 4 (Bloomberg) — Citigroup Inc. reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years.

The biggest U.S. credit-card lender lost $176 million in the second quarter packaging card loans into securities, the company said in an Aug. 1 regulatory filing. The New York-based bank completed fewer deals and was forced to mark down its own $9 billion stockpile of the debt instruments and other stakes the company amassed while selling them to investors.

Banks and other card issuers “are predicting higher net charge-off rates across the credit-card industry,” said Meghan Crowe, a Fitch Ratings analyst who tracks credit-card issuers including American Express Co., Capital One Financial Corp. and Advanta Corp. “Things have been worse than anticipated.”

Banks’ interests in securitized credit-card loans are vulnerable partly because of the way the deals are packaged, according to Fitch’s Crowe. Security holders typically are granted senior interests, meaning they stand first in line to get repaid if loan losses climb or the instruments default. Banks often retain the junior interests, meaning they’re first to absorb the losses.

“These guys hold the lower pieces,” Crowe said, declining to comment on Citigroup specifically.

Citigroup’s Capitalization

Citigroup claims to be “well capitalized”. The claim is nonsense if you consider its $1 trillion off balance sheet arrangements and its marked to fantasy level 3 assets.

I just listened to a Bloomberg Audio/Video on Citigroup with Mark Sunshine.

Here is a transcript of a couple of pertinent points in an interview that took place shortly after earnings.

Mark Sunshine: “Citigroup’s tangible equity ratio is 2% if you re-consolidate its off balance sheet assets. That is catastrophically low. The other thing that was interesting with the Citigroup release was the securities and banking revenue was down 94%. Somehow they managed to bury in the release, that the fee income and a bunch of other components that was the old Salomon Smith Barney has fallen off the side of a cliff.”

For more on Citigroup’s off balance sheet holdings, please see Citigroup’s $1.1 Trillion in Mysterious Shadow Assets.

There is no way Citigroup can afford to bring those assets on its balance sheet. Miraculously, the FASB just postponed a rule change that was just about to go into effect that would have forced Citigroup to do so. Citigroup statements suggest it may have even had advance warning that the rule change was about to be postponed. For more on this topic, please see Not Practical To Tell The Truth.

Citigroup got the delay it wanted. Now what? Now you can add credit card losses to the long list of problems facing Citigroup. Will those off balance sheet assets be worth more a year from now than today? Hardly. Will the situation with credit cards be any better a year from today? Hardly. And as the Fed the SEC, and others continually allow banks to delay addressing the problems they are facing, those problems keep growing in size.

Mike “Mish” Shedlock
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