Update on Changes at Credit Writedowns
Thank you for all of the wonderful support in responding to my Monday post about changes at Credit Writedowns.
Before I go into everything I have learned from your feedback, let me get something off my chest. I hope I sometimes seem opinionated because I think it’s important to stand behind what you write. And I like to speak my mind. However, I have to be honest; I pull my punches. There a couple of reasons why and its the major driving motivation for me to make part of this site paid.
In August 2008, I wrote a post on Washington Mutual called “WaMu on the brink of disaster: has agreement with regulators”. In it I wrote:
This is the step that regulators take to prepare the playing field for a potential bankruptcy or takeover. Remember, Washington Mutual is far bigger than IndyMac, which is the largest default we have seen in this credit crisis in the U.S. outside of the GSEs. If the FDIC were to take on Washington Mutual, it would need to have its funding base topped up by guess who — you, the taxpayer. And remember, Washington Mutual has over $300 billion in assets. If it were a bank and not a saving & loan, it would be America’s 8th largest bank.
Other financial institutions known to have a similar agreement with the OTS are National City of Cleveland, OH, also certainly needs to be on the FDIC’s list and Downey Financial.
In hindsight we know that WaMu was seized by regulators, perhaps prematurely. But it was clearly in trouble, as were NCC and Downey. In any event, I received a lot of vitriol for this post from investors and had the piece pulled temporarily from Seeking Alpha, where I was a top contributor, to ‘fix’ the wording. The point is it was then that I realised that blogging can have an impact and that I have to be wise in my word choice.
The Citi Incident
The next year, exactly two year ago today I wrote “How is Citi going to deal with $38 billion in deferred tax assets?” questioning how well-capitalised Citigroup was. The response?
The head of Citigroup Financial Communication wrote the editors of Seeking Alpha:
The article below by Edward Harrison is very misleading to state that Citi is the "weakest" financial firm — clearly, our capital and liquidity numbers don’t show it (see attached slide for key financial figures). Our capital and liquidity levels are among the highest in the industry. We would appreciate that the author make note of these clear facts. Thanks for your consideration.
Citi was demanding that I change the article. I didn’t and Seeking Alpha stood behind me. Instead I wrote a post the next day called “How well capitalized is Citigroup?“ clarifying the previous one. I wrote:
In a recent post, “How is Citi going to deal with $38 billion in deferred tax assets?,” I pointed to a Reuters article which called into question Citigroup’s ability to earn enough money to prevent its having to take a charge for an incredibly large deferred tax asset. That post generated a response from a Citi representative who emphatically defended Citi’s capital position with a chart comparing Citigroup to other large global financial institutions.
Below is that chart:
As you can see from the chart, based on Citi’s reported public accounts, the company is well-capitalized. Moreover, even hedge fund operators like John Paulson who maid a mint on shorting financials in 2007 and 2008 now think Citi is in much better condition. Paulson was known to be buying shares in August.
Citigroup has received more money from the government ($45 billion) than any other bank in the U.S., none of which has been paid back. Moreover, the government was forced to not just forgo dividends on its preferreds but also convert these into common equity and provide debt guarantees for the company. Absent government money, Citigroup is the worst capitalized big bank. Absent government money, Citigroup would not exist.
I see Citigroup as emblematic of the problems we face in dealing with large systemically dangerous institutions. They insist that we return to some semblance of business as usual after they have received massive bailouts without any clear timeline when those monies will be repaid – if ever. Meanwhile, it is far from clear what these institutions would look like if the collateral they put up for loans received from the Federal Reserve and the rest of their assets were marked to market.
Now, when I write “based on Citi’s reported public accounts, the company is well-capitalized… Meanwhile, it is far from clear what these institutions would look like if the collateral they put up for loans received from the Federal Reserve and the rest of their assets were marked to market.” I was telling you I think their capital base is dodgy and that they are only well-capitalised because they don’t mark to market.
I realised then that a blogger’s talking publicly about specific stocks in a negative way can lead to legal action. I almost never talk negatively about specific stocks. Look, this is a free site. I don’t need the legal hassle. Look at what happened to my friend Aaron Krowne with Government coercion in the financial blogosphere. Here he was with the New York Times ripping off his site’s content and still taking all of the legal heat. How is that fair?
And now that we are talking about the sovereign debt crisis, I have to admit I pull my punches there too. I am not a hedge fund guy trying to talk my book. I am an analyst trying to explain the likely outcomes. If I end up influencing them in the process, then I have become part of the story and that’s a different kind of blogging than I am looking to do. That’s what was behind my post Less Policy Advocacy and More Policy Forecasting at Credit Writedowns.
Anyway, I hope that gives you a sense of what goes on behind the scenes. Me, I am looking forward to getting a paywall up and speaking my mind about specific stocks and making specific actionable calls based on the global macro and policy outlook. My intention is to not advocate a specific policy course but to make a forecast of what is likely to happen given the available information and the political and economic constraints and to identify how this will affect the economy and financial markets. That is easier said than done because you get attached to a specific policy course you have forecasted and start recommending it instead of forecasting it. I feel this with the whole euro zone/ECB policy debate, the one I think is the most critical to get right to make an informed choice about likely economic and financial market outcomes for years to come!
So that’s what’s behind my motivations here to move to a hybrid paid/free model.
What you guys told me
So what have I learned since Monday? I think I learned that a decent number of you value this site. I haven’t started the free site’s fundraiser yet and I already have gotten 13 donations from the donate button now on the site. I love you for that! Thank you, readers, for being so generous.
I also learned that I could put up a lot more advertising than I do to help defray the costs of maintaining the site. I am already moving on that score. I think I learned there is an appetite for getting onboard the premium version of this site. You all are willing to pay. The question, of course, is how much is it worth? Please write me at email@example.com and tell me. My key takeaway on this question so far is that a paid newsletter is best if it has specific actionable recommendations – ones that I told you I have not been making for the reasons I just outlined. I guarantee you this is where I am headed then.
The one question to be satisfied is where the split between paid and free will come into play. Going forward, I think I will try to post more on the free site. But what I post will be timely and blogworthy news and analysis. There will be no more long-form background pieces and no probably no more advocacy pieces. I want to be paid for the time and effort that goes into that research if I am going into the newsletter business.
Anyway, that’s where I am now. Actually, there’s a lot more I want to say and perhaps I will say it in the fundraiser kickoff post next week. But this post is getting way too long already. I do want everyone who has written me to give feedback to know that it has been much appreciated. I apologize if I have not responded.
Next week I am going to copy Yves Q. Smith of Naked Capitalism’s fundraising idea and do a week long fundraiser to raise money for the blog. I will request she give me no money from her fundraiser for that very reason then. This blog will continue to contain all of the insights of my worthy colleagues who post here plus my own news and analysis. I aim to get 8-15 posts out per day on that score. Long form stuff and actionable research will now be on the paid site.
That’s it. Many thanks for your readership. Keep reading, keep commenting, keep coming back. I have really enjoyed this and want it to continue for a long time to come.