Unfortunately my most recent prediction about implications of Paulson's fiasco with TARP seems to be coming true- run on the "next weakest" bank- Citi. Now according to this WSJ article- Citigroup's execs are considering following the steps of Wachovia and Merrill by selling out? While I personally believe that despite all the negative news Citi actually has quite a valuable franchise, and appears to have plenty of capital to get them through this mess, shorts decided differently and now are certainly having a great time running them into the ground...The only question now is who could possibly buy Citi in one piece? HSBC is really the only bank that could possibly pull it off at this time.

"The internal discussions are at a preliminary stage and don't signal that Citigroup's board and management are backing down from their insistence that the New York company has ample capital, funding and strategic direction, these people said. But with the stock down another 26% Thursday, its worst one-day percentage decline ever, Citigroup officials have decided they need to reckon with a range of scenarios that were unthinkable only weeks ago."

Bad news don't stop there- it is now official- current decline is worse than the one in 1929. Below is a great chart from Doug Short's blog showing how the worst bear market declines unfolded. Surprisingly enough, current fiasco is already worse than the first leg of the 1929-1932 bear market.

The only good news I can come up with after reviewing many of these charts is that we have to be nearing a point of a pretty significant counter trend rally. What can trigger it? I am not yet sure but most likely some kind of government action like short selling ban, massive stimulus announcement or simultaneous global rate cut. Because of that possibility I decided to take profits on my SDS ultra short position today as these ETFs tend to move much faster on the downside than on the upside...

Stay safe out there, I know it's tough skepticalcapitalist@gmail.com

Was Paulson's decision to pull the plug on the original TARP idea of investing into the illiquid assets a smart thing to do? I am almost certain that while the original goal has never been too realistic to begin with the implicit existence of a potential "cleanup fund" has certainly helped to slow the decline in security values for a little while, so cancelling it now does not sound like a smart idea. In my opinion, it is just another example of government intervening into the economy by changing the rules in the middle of the game and potentially making things worse instead of better.

Simply glancing at the prices of both residential and commercial mortgage backed securities, as presented by Markit.com since the TARP announcement, confirms that situation deteriorated so rapidly, that even I now suspect that we might very well need another round of equity injections into the "big boy" banks before it's all over...

The recent decline of values in both commercial and residential securities has been simply stunning to say the least. I am not sure if free fall is the right word, but it certainly does not look promising. It does appear that there were quite a few investors expecting to unload their paper to the government, and with the "purchase" program now all but cancelled these investors unloaded their paper simultaneously over the last several days likely making losses even more painful for a whole bunch of financial sector players.

Residential MBS values...

source: markit.com

Commercial MBS spreads- higher number means lower values...

source: markit.com
The only fundamental question now is whether these declines represent the real underlying asset values or are they merely an indication of the accelerating liquidity crunch? Most of the number crunching points to the first scenario; however, too many of the current players might not make it long enough to find out...

Being safe out there now is much tougher than just a week ago...Go SKF?
skepticalcapitalist@gmail.com

Still wondering why hedge funds are blowing up? Listen to Ackman- by far the most impressive interview I've seen in years...

I've tried to explain the past- blame the SEC short selling ban for a big chunk of the recent mess...

skepticalcapitalist@gmail.com