Citigroup Raises $7.5 Billion

Citigroup to Raise $7.5 Billion From Abu Dhabi State (Update2): “Citigroup Inc., the biggest U.S. bank by assets, will receive a $7.5 billion cash infusion from Abu Dhabi to replenish capital after record mortgage losses.”

This might be the catalyst to give the financials a little bit of a relief pop.

“With the purchase of a 4.9 percent stake, Abu Dhabi, the largest emirate in the United Arab Emirates, would rank as Citigroup's largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.

Mortgage writedowns cut Citigroup's “tier 1” ratio, a metric used to assess banks' ability to weather loan losses, to 7.3 percent on Sept. 30. The figure, while above U.S. regulators' 6 percent threshold for a “well-capitalized” bank, was below the bank's 7.5 percent target.

The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010 and Sept. 15, 2011. Citigroup fell to $29.80 in New York Stock Exchange composite trading yesterday, the lowest price in five years, and traded in Germany at $31.51.

“The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83,” said George Nikas, who helps manage $1 billion at Deutsche Bank AG in Sydney.

Abu Dhabi will have “no role in the management or governance of Citi, including no right to designate a member” of the company's board, Citigroup said in its statement.”

If the markets can’t build a little bit of positive momentum on this, then that would be a bad sign indeed.

Citigroup Plans Cost Cuts After Mortgage Writedowns (Update1): “Citigroup Inc., the largest U.S. bank, is reviewing ways to cut costs as it seeks a new chief executive officer and grapples with mortgage writedowns that may lead to the first quarterly loss since at least 1998.

Citigroup may cut as many as 45,000 jobs in the next two months, CNBC reported earlier today, citing unidentified people within the company. CNBC also said the bank had “no timetable or set numbers” for the cuts. Citigroup spokeswoman Pretto said “any reports on specific numbers are not factual.””

Maybe the combination of a cash infusion and job cuts can breathe some life into Citigroup for a little while.

U.S. Notes Fall; Citigroup Equity Sale Cuts Demand for Safety: “Treasury two-year notes fell the most in almost a month after Abu Dhabi agreed to invest $7.5 billion in Citigroup Inc. and the Federal Reserve pledged funds needed to avoid a year-end shortage of capital.

The promises calmed investors who drove two-year yields to 2.87 percent yesterday, the lowest since December 2004. The Fed said yesterday it will provide funds to the money markets, while the Citigroup purchase may help the world's biggest bank replenish capital hurt by subprime mortgage-related writedowns.

“The buying pressure on Treasuries has gone away,” said Christoph Kind, a Frankfurt-based fund manager at Frankfurt Trust Investment GmbH, which manages about $9 billion in fixed- income assets. “The news about Citigroup restored confidence a little. There's more value left in other bond markets.”

The “TED” spread, or the difference between three-month bill yields and the London interbank offered rate, narrowed 1 basis point to 1.94 percentage points, still near the widest since Aug. 20. The decline indicates easing willingness among banks to lend to each other. Three-month Libor still rose for a 10th day today to 5.06 percent, the highest in four weeks, the British Bankers' Association said today.”

Yen Declines as Citigroup Stake Sale Revives Carry-Trade Demand: “The yen fell against the world's 16 most-active currencies after Abu Dhabi said it will buy a stake in Citigroup Inc., giving investors confidence to buy higher yielding assets with loans from Japan.

The yen declined the most in two weeks against the dollar after the biggest U.S. bank announced the $7.5 billion cash infusion, which will shore up its capital following record losses related to subprime mortgages. The yen dropped the most against the New Zealand and Australian dollars, favorites of so-called carry trades. The dollar rose versus the euro and the U.K. pound.

“The market has taken this as a positive sign that there is funding out there for these banks should they need it,” said Daragh Maher, London-based senior currency strategist at Calyon, the investment-banking arm of Credit Agricole SA. “This has reduced some of the strain and given carry-trade investors a boost in what is clearly a very jumpy environment.””

The First SIV Goes On Balance Sheet

HSBC Will Take on $45 Billion of Assets From Two SIVs (Update2): “HSBC Holdings Plc, Europe's largest bank, will add $45 billion of assets to its balance sheet by consolidating two structured investment vehicles it manages.

Investors in the SIVs will be able to exchange their holdings for debt issued by a new company, backed by loans from HSBC, the London-based bank said in a statement. HSBC doesn't expect any “material impact'' on its earnings or capital strength, according to the statement.

HSBC's decision reduces the worldwide assets in SIVs as U.S. lenders led by Bank of America Corp. seek to persuade competitors to help finance an $80 billion bailout of the companies. HSBC's Cullinan Finance Ltd. and Asscher Finance Ltd. have more than $34 billion of senior debt, making it the second-largest bank sponsor of SIVs after Citigroup Inc.”

How taking onto your balance sheet an unexpected $45 billion isn’t going to have a ‘material impact’ is beyond me.

Bank of America Takes Lead in Backing `SuperSIV' Fund (Update1): “Bank of America Corp., the nation's second-largest bank, will lead efforts by Citigroup Inc. and JPMorgan Chase & Co. to convince smaller competitors to help finance an $80 billion bailout of short-term debt markets.

The campaign starts this week with New York-based Citigroup and JPMorgan in supporting roles to Charlotte, North Carolina- based Bank of America, said two people with knowledge of the matter, who didn't want to comment publicly before the plan is formally announced.

The “SuperSIV” fund, backed by U.S. Treasury Secretary Henry Paulson, would buy assets from so-called structured investment vehicles, whose $300 billion of holdings include corporate and mortgage debt in danger of default. Analysts including Richard Bove of Punk Ziegel & Co. have criticized the proposal because it may saddle new participants with losses created by their bigger rivals.

``Why should we put something on our balance sheet that is going to result in further writedowns?'' is how most contributors will respond, Bove said in an interview. ``The job of the Treasury isn't to go out and defraud investors.''

Bank of America, Citigroup and JPMorgan, the three largest U.S. banks, want SuperSIV in place by year-end because some SIVs haven't been able to trade, people familiar with the fund said. BlackRock Inc., the biggest publicly traded U.S. money manager, probably will manage the fund, said a person with knowledge of the plan.”

Bad ideas are hard to kill. With HSBC moving their SIV assets onto their own balance sheet, the likelihood of the Super SIV ever seeing the light of day is greatly reduced.

Northern Rock Favors Virgin Offer; Treasury Approves (Update3): “Northern Rock Plc, the U.K. mortgage lender bailed out by the Bank of England two months ago, said the government backed Richard Branson's Virgin Group Ltd. as the preferred bidder for the company.

Northern Rock rose as much 57 percent in London trading after saying today in a statement that Virgin offered an immediate repayment of 11 billion pounds ($22.7 billion) toward about 25 billion pounds lent by the central bank. Virgin would also inject 1.3 billion pounds into Northern Rock, half funded by new shares offered at 25 pence each to existing holders.

“It's an indicative proposal and not an offer, and could leave the door open to a counter-bid,'' said Simon Willis, a London-based analyst at NCB Stockbrokers. “That's why I can see the shares trading higher.””

An acquisition by Virgin at these prices would definitely act as a catalyst for a short lived ‘relief’ rally in the broader indices.

Flight To Quality

Nasty Rumour Monday

Dow Theory Hints of Bear Market

Dow Theory is flashing some serious warning signs here. In Dow Theory, Dow Transportation average must confirm the highs or lows in the Dow Industrial average. This is now occurring. In fact, the Dow Transportation average is currently leading the charge lower and has now broken through the August panic lows.

Cohen, Bianco See Year-End Rally; Dow Theory Says No (Update3): “What do Abby Joseph Cohen, Jason Trennert and David Bianco know that the Dow Theory doesn't?

The strategists at Goldman Sachs Group Inc., Strategas Research Partners LLC and UBS AG say the Standard & Poor's 500 Index will climb 9.7 percent from its Nov. 16 close to 1,600 in the final six weeks of 2007, the steepest gain since 1971.

This month's drop in transportation stocks suggests equities may decline instead. With FedEx Corp. and Ryder Systems Inc. leading the Dow Jones Transportation Average to its lowest level this year, the rest of the U.S. market may slump too, according to the 123-year-old theory that says truckers, railroads and airlines lose business before the economy slows.

“The transports have broken down,” said Jack Ablin, who oversees about $52 billion as chief investment officer at Harris Private Bank in Chicago. “We're going to need a boost on the economic front to really help push the market higher. I wouldn't bet on it.”

The transportation average of 20 stocks, created by Wall Street Journal co-founder Charles Dow in 1884 to foretell economic trends, fell today to the lowest since October 2006. A drop in the 30-member Dow Jones Industrial Average, which Charles Dow compiled 12 years later, below its level on Aug. 16 would signal a bear market is about to begin, the theory holds.

“We've moved one step closer to a bear market,” said Chuck Carlson, an editor at the Dow Theory Forecasts newsletter who manages $130 million at Horizon Investment Services in Hammond, Indiana.”

Should these levels hold, expect a violent and impressive short covering bounce...