the tax play - bailout through the backdoor

On the left hand the income statement of JP Morgan and as we can see the income tax expense over the last 4 years accumulates to 19 bil., Washington Mutual has for the same time frame 5.5 bil. of paid taxes. Plus the tax provisions of Bear Stearns. So when JPM goes ahead and writes of 31 bil. of losses on the loan book of WAMU they will get a huge check from the IRS next year although the taxpayer has guaranteed for 29 bil of toxic debt for BSC. JPM is making big money on the back of taxpayers.
Bloomberg the Mayor of NY said they were in trouble since no tax income from Wallstreet was due for years to come - well that's only half of the truth - the IRS will have to send a lot of tax-money back to banks adding up to at least 200 bil. which have to be funded as well by the Treasury.

Citigroup survival strategy short term is based on this recapitalization strategy that's why they bought Wachovia at the cost of 42 bil. of write downs and pay a 12 bil. in Prefereds to the FDIC. First of all they tripled their deposit money access which eases big parts of their funding problems but more importantly besides the effect of getting alone for this 4 years a tax refund potential 0f 37 bil. which still does not help to survive will be the fact that they have a deal in place behind the scenes that they can participate big time in the bailout program. They need desperately to sell worthless assets at 65 cents in chunks of at least 200 bil. for a starter - the total exposure is 600 bil. hence a valuation back up to 65 cents (also in marking terms) brings them back to 400 bil so the gap will have narrowed to 200 bil worst case. With the changes in the mark to market they can now officially overvalue the assets they have and with the tax infusion afford to sell off parts of the toxic assets which they were not able to do so far.

The taxpayer will make a cash infusion of over 40 bil. into Citi and buy their worthless assets for 65 cents. The bailout of Citigroup is sadly enough inevitable since its failure would put the world markets into disaster but its done on an unfair way for the taxpayer who bails them out. A direct capital infusion of 150 bil. in exchange for shares would be the right way to do it but that would be against the old share owners interest which seems in this case to be a priority.

http://query.nytimes.com/gst/fullpage.html?res=9A0DE5D61139F93AA25754C0A9649C8B63

Published: July 19, 2002

Prince Walid bin Talal of Saudi Arabia, the biggest shareholder of Citigroup Inc., bought $500 million of its stock, saying the shares are ''very tempting'' after losing 27 percent of their value this year. ''Citigroup is very cheap, too cheap at current prices,'' said the prince, the 45-year-old nephew of King Fahd. The prince first invested in Citigroup's predecessor, Citicorp, in 1991 when the bank was reeling from loan losses in Latin America and real estate. The investment is the second this year in Citigroup by Prince Walid. The prince said the value of his Citigroup holding now exceeds $10 billion, representing a stake of 5.2 percent based on yesterday's $36.93 share price.

http://afp.google.com/article/ALeqM5ivob-uKBAnebClZhFe9Gtmqf5ArA

Nov 26, 2007

NEW YORK (AFP) — A United Arab Emirates investment fund Tuesday was poised to become one of Citigroup's biggest shareholders, in a 7.5-billion-dollar deal that will help shore up the ailing US bank's coffers.

The state-run Abu Dhabi Investment Authority (ADIA) is controlled by the largest emirate in the oil-rich UAE. Other UAE-based funds have recently bought interests in American technology firms, private equity groups, retailers and big Las Vegas casinos.

The UAE's investment spree has been spurred by rocketing crude oil prices, which have flirted close to 100 dollars a barrel, and a tumbling US dollar which has cheapened American assets for overseas buyers.

Citigroup announced late Monday that it would receive 7.5 billion dollars from the ADIA for a 4.9 percent stake, making the Abu Dhabi fund one of the largest shareholders in America's second-biggest bank by market worth.

Citibank's survival depends very much on this bailout and that it can participate in big proportions. Out there are 3 trillion of subprime and Alt-A mortgage issuances which should be marked 10-20 cents but aren't who all will compete for those funds. That's another eason why Sarkozy comes up with a similar plan for 450 bil. $ but even if that works out and we add the other commitments which were made so far we only come up with 1.5-1.8 tril. being short well over a 1 tril. on this chunks. Plus Europe has problems on its own with UK,Spain,Ireland real estate markets imploding. The books of US banks are full of home loans which were not institutionalized and carry losses of hundreds of billions. With the economies deteriorating the momentum is even pickung up and deposit holders are nervous around the world. Gold is sold out to the outlet for retail buyers like Krugerrand coins. Soon we will have a temporary bottom as the retail run on Gold and the VIX at 50 shows - very much around election day in the US and in 2009 we will have the dangerous illusion we skipped the crisis - that by the way when things look relaxed by mid 2009 will be a good time to buy gold since 2010 carries the potential for a much deeper crises with the years to follow. More on that as we will see how things play out in 2009.