HSBC Fund Bailout Raises Questions About Whether Citigroup Should Follow Its Lead.
Calls for more transparency at Citigroup Inc. grew louder Monday when HSBC Holdings PLC said it would put two funds with mortgage exposure on its balance sheet and spend $35 billion to bail them out.
Citigroup said it has no plans to mimic HSBC's move. So far, Citi has committed $10 billion in liquidity to the seven structured investment vehicles it manages on an "arm's length" basis, and has kept them off its balance sheet -- meaning Citi has not been counting the SIVs' debt as its own.
That strategy may end up backfiring, though, some industry watchers say, because shareholders, fed up with remaining in the dark about how much risk the largest U.S. bank holds, are selling off.
HSBC, Europe's biggest bank, saw its shares slide 1.9 percent in London Monday. Citigroup shares, meanwhile, dropped 3.2 percent and hit a five-year low, dampened additionally by worries about possible layoffs.
"Citi is in what I'll call a reputation race," said Ed Ketz, associate professor of accounting at the Smeal College of Business at Pennsylvania State University and co-author of a new book called "Fair Value Measurements." "It is competing with HSBC and others in terms of who can be trusted."
HSBC is betting that taking ownership of Cullinan Finance Ltd. and Asscher Finance Ltd. -- SIVs that in total have $45 billion in assets -- will restore investor confidence. "I like what HSBC has done. It's a very simple solution. It's one that's transparent. We can see the promise of liquidity. That's something that, to me, would create a feeling of trust," Ketz said. "Citi could go a long way in following this example."
SIVs, which JPMorgan Chase & Co. CEO Jamie Dimon recently predicted will "go the way of the dinosaur," have hit snags this year. The vehicles sell short-term debt, such as unsecured commercial paper, to investors such as hedge funds, then use the proceeds to buy longer-term assets, like mortgage-backed securities, that yield richer returns.
SIVs normally generate money through fees and the difference between short-term and long-term rates. But demand for short-term assets has vanished in the midst of the U.S. housing market implosion, creating liquidity problems for the vehicles.
Citi, still awaiting a new chief executive, is caught in a bit of a Catch-22. If Citi changes its mind and put its SIVs on its balance sheet, it may be forced to take even bigger write-downs than the $8 billion to $11 billion it projected for the fourth quarter. The seven SIVs have, in total, about $83 billion in assets.
But if Citi doesn't put its SIVs on its balance sheets and other banks do, it risks looking as if it is deliberately obscuring its holdings. Other companies that manage SIVs besides Citi and HSBC include MBIA, Rabobank, Standard Chartered Bank, Bank of Montreal and Societe Generale.
HSBC's move also complicates Citi's plans for a "super fund" to buy up hard-to-sell securities -- an arrangement that does not appear to be attracting as many participants as Wall Street hoped. So far, only Wachovia Corp. has officially agreed to participate in the plan, after Citi, JPMorgan Chase & Co. and Bank of America Corp. announced the project seven weeks ago.
"With someone like HSBC throwing in the towel, going for transparency ... it makes Citi and the other parties look conspiratorial at this point if they don't 'fess up and do that," said Jack Ciesielski, publisher of the industry newsletter The Analyst's Accounting Observer.
So far, auditors have not told Citi it must put its SIVs on its balance sheets. "Variable interest entities" like SIVs are allowed to be off-the-books as long as the bank does not hold more than 50 percent or more of the risk or reward involved in the entity, said Russ Golden, director of technical application and implementation activities at the Financial Accounting Standards Board.
Still, banks remain under close scrutiny for their fixed-income holdings, particularly the products known as collateralized debt obligations, or CDOs. CDOs are chopped-up and rebundled chunks of assets, including mortgage-backed assets, and have plunged in value in recent months.
The four major auditing firms -- PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG -- as well as BDO International and Grant Thorton have drawn up standards to appropriately value bank holdings. The paper, still in draft form, will be published in December, said PwC partner Pauline Wallace.
Calls for more transparency at Citigroup Inc. grew louder Monday when HSBC Holdings PLC said it would put two funds with mortgage exposure on its balance sheet and spend $35 billion to bail them out.
Citigroup said it has no plans to mimic HSBC's move. So far, Citi has committed $10 billion in liquidity to the seven structured investment vehicles it manages on an "arm's length" basis, and has kept them off its balance sheet -- meaning Citi has not been counting the SIVs' debt as its own.
That strategy may end up backfiring, though, some industry watchers say, because shareholders, fed up with remaining in the dark about how much risk the largest U.S. bank holds, are selling off.
HSBC, Europe's biggest bank, saw its shares slide 1.9 percent in London Monday. Citigroup shares, meanwhile, dropped 3.2 percent and hit a five-year low, dampened additionally by worries about possible layoffs.
"Citi is in what I'll call a reputation race," said Ed Ketz, associate professor of accounting at the Smeal College of Business at Pennsylvania State University and co-author of a new book called "Fair Value Measurements." "It is competing with HSBC and others in terms of who can be trusted."
HSBC is betting that taking ownership of Cullinan Finance Ltd. and Asscher Finance Ltd. -- SIVs that in total have $45 billion in assets -- will restore investor confidence. "I like what HSBC has done. It's a very simple solution. It's one that's transparent. We can see the promise of liquidity. That's something that, to me, would create a feeling of trust," Ketz said. "Citi could go a long way in following this example."
SIVs, which JPMorgan Chase & Co. CEO Jamie Dimon recently predicted will "go the way of the dinosaur," have hit snags this year. The vehicles sell short-term debt, such as unsecured commercial paper, to investors such as hedge funds, then use the proceeds to buy longer-term assets, like mortgage-backed securities, that yield richer returns.
SIVs normally generate money through fees and the difference between short-term and long-term rates. But demand for short-term assets has vanished in the midst of the U.S. housing market implosion, creating liquidity problems for the vehicles.
Citi, still awaiting a new chief executive, is caught in a bit of a Catch-22. If Citi changes its mind and put its SIVs on its balance sheet, it may be forced to take even bigger write-downs than the $8 billion to $11 billion it projected for the fourth quarter. The seven SIVs have, in total, about $83 billion in assets.
But if Citi doesn't put its SIVs on its balance sheets and other banks do, it risks looking as if it is deliberately obscuring its holdings. Other companies that manage SIVs besides Citi and HSBC include MBIA, Rabobank, Standard Chartered Bank, Bank of Montreal and Societe Generale.
HSBC's move also complicates Citi's plans for a "super fund" to buy up hard-to-sell securities -- an arrangement that does not appear to be attracting as many participants as Wall Street hoped. So far, only Wachovia Corp. has officially agreed to participate in the plan, after Citi, JPMorgan Chase & Co. and Bank of America Corp. announced the project seven weeks ago.
"With someone like HSBC throwing in the towel, going for transparency ... it makes Citi and the other parties look conspiratorial at this point if they don't 'fess up and do that," said Jack Ciesielski, publisher of the industry newsletter The Analyst's Accounting Observer.
So far, auditors have not told Citi it must put its SIVs on its balance sheets. "Variable interest entities" like SIVs are allowed to be off-the-books as long as the bank does not hold more than 50 percent or more of the risk or reward involved in the entity, said Russ Golden, director of technical application and implementation activities at the Financial Accounting Standards Board.
Still, banks remain under close scrutiny for their fixed-income holdings, particularly the products known as collateralized debt obligations, or CDOs. CDOs are chopped-up and rebundled chunks of assets, including mortgage-backed assets, and have plunged in value in recent months.
The four major auditing firms -- PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG -- as well as BDO International and Grant Thorton have drawn up standards to appropriately value bank holdings. The paper, still in draft form, will be published in December, said PwC partner Pauline Wallace.
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