Tuesday, January 15, 2008

Why is trouble brewing?

Buried in Citi's 4Q earnings release which has $18bn of writedowns is this nugget:

"In addition, the company is continuing to reduce its Consumer-based holdings of mortgage-backed securities, and other assets held in its Securities and Banking business. Overall, in the fourth quarter, the company reduced its GAAP assets by approximately $176 billion, representing approximately 7.4% of its balance sheet."

Citi is deleveraging. Banks are the biggest creators of liquidity. As banks reduce their balance sheets, liquidity goes down. People who are saying that liquidity will be created because Fed is cutting rates do not realize who creates liquidity. It is not the Fed - it is the banks.

The asset backed commercial paper market has shrunk from $1.2trillion in August to $800 billion now. That deleveraging plus Citi's deleveraging = $576billion of liquidity that has vanished. Ane here in India, investors are getting excited about $20 billion of FII flows.


Shantanu said...

You nailed this one Boy!! Impeccable timing. Question is, after the bloodbath, is the trend still down?


Theirs always trouble somewhere.