News Item: Citigroup Posts Record Loss on $18 Billion Write-down
Our Pal C.R. Looking at these huge losses just makes you think that these companies are too big to be managed.
Eric: GOOD POINT. BUT LETS FACE IT...PEOPLE GOT FIRED IN '06 (LIKE KRONTHAL AT MERRILL) FOR not GETTING INTO THE MORTGAGE CREDIT GAME...FOR NOT TAKING ENOUGH RISK (LIKE MACK WANTED THE STANLEY GUYS TO DO) ETC...THEY ALL GET INTO FRENZY NOT TO GET LEFT BEHIND AND THE NEXT THING YOU KNOW, THE FIRM IS CHASING DOWN EVERY LAST BAD DEAL THEY CAN FIND.
Rich: And that was chasing down the deals not only in residential credit, but CMBS and High Yield too.
Eric: And by chasing I mean throwing leverage to anybody or any structure that needed it, getting rid of covenants, etc. There was one common theme and that was leverage or funding. That makes assets that the risk management types (read that to be those with little common sense) would view as uncorrelated, to be completely correlated!
Our A.C.: And the funding and risk license was like a binary gate. One minute the firm has balance sheet to burn and risk license to the sky, and then all it takes is one of those business lines to explode..and the balance sheet and risk license goes to zero.
Eric: Exactly, taking down the CMBS and High Yield with it.
Our Pal C.R.: No firm has a culture of "No" -- Mgtm: "last yr you made $4bb -now we need you to make $5B" how do i do that? take more risk
Eric: Right, you would walk into these beginning of the year meetings and they would role out the new “budget” and they would tell you that the new target…after a record setting year…is 15% higher than last year. Oh, and by the way, the firm wants to reduce the compensation vs revenue expense ratio…so to make what you made last year you really have to jack it up by 25%!
Rich: That about sums it all up.