Vikram won't be happy. Estimates put Citigroup's total exposure at $35 billion.
Editor's Note: This is another in our series of articles from late 2010, that we are reposting in the wake of Friday's landmark foreclosure ruling from the Massachusetts Supreme Court.
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Citigroup faces putback risks
Now that Bank of America has been hit with a giant lawsuit from mortgage bond investors demanding the bank repurchase loans, investors will scramble to figure out the levels of exposure at every other major bank.
So how large is Citigroup’s exposure? Using some figures from Citi’s earning’s presentation and financial analyst Dick Bove, I’ve concluded that as much as $58 billion in bubble-era home loans packaged in mortgage backed securities serviced by Citi have or will likely default. Citi may be liable for buying back as much as $35 billion of the loans. After recovering some of that through foreclosure sales, Citi may be looking at a loss of $22 billion.
A few caveats are in order. Citigroup will likely fight the demands that it repurchase the loans. The lawsuits will take years, which is both good and bad for Citi. It’s good because it means put-backs are unlikely to quickly punch a hole in Citi’s balance sheet. It’s bad because it means this could weigh on earnings for years and legal costs will keep mounting.
Most importantly, these numbers are only my best estimates of Citi’s future put-back liabilities. I cannot say for certain—no one can—what the ultimate cost of the put backs will be for Citi. The number could be far smaller than our estimate. Or it could be larger.
My starting point is trying to estimate the total size of Citigroup’s securitization business during the worst years of the housing bubble. On the earnings call yesterday, CFO John Gerspach discussed a portfolio of loans that Citi services but does not hold. His remarks suggested that Citi is using this portfolio of loans as a way of putting a framework around their total third-party put-back risk.
My methodology is to apply the lessons of my article yesterday, on Dick Bove's analysis of the aggregate cost of bank putback risk, to the loan portfolio discussed below.
TARP 2.0 bitchez.
- "Foreclosures are going to overwhelm Bank of America and Wells Fargo."
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