I stumbled across an interesting blog over the weekend called “The Automatic Earth.” I had been doing some research into writedowns at financial institutions due to loan losses and asset impairment when a great entry from The Automatic Earth popped up. It said:
An important yet mostly neglected little “detail” that will come home to roost, and big time.
It’s much easier to borrow the first $260 billion than the second. And banks like Citi and Merrill already pay 7-8-9% over some of the capital injections they have received from foreign sovereign funds, with the Federal Funds rate, to which they also have access, standing at 2%. Paying a 4-5% dividend with money over which you pay 8% interest is a set-up that won’t last long.
That’s why Citi announced last week it will sell off $400 billion in assets; their access to capital is drying up fast. The main question is: how much will they get for those assets? My little man inside says it will be less than $200 billion, perhaps much less. Diminishing returns OR receding horizons?
–The Automatic People, 16 May 2008
Ain’t that the truth. It will be quite interesting to see what types of capital raising exercises we will see in Q3 and Q4 in particular because these writedowns are far from over. The question then will be: who’s going to pony up?
Great blog that is now on my blogroll. Give it a go.