Company Specific

Hmmmm....

Someone smelled a bit of smoke yesterday, but the real fire sale was this morning.....

To put this in perspective that issue traded nearly 8 million shares today, against a normal volume of 1/10th that.

PHK is a closed-end PIMCO fund.  What's in there?  As of September 30th, Pimco disclosed the holdings - have a look....

There's a pretty good mix of "stuff", including a fair bit of mortgage-related exposure. 

What would prompt "someone" to unload nearly $80 million bucks worth of this issue more-or-less "all at once" earlier today - and with what looks like a market order - a "get me out right now irrespective of price" sort of circumstance?

I have no clue, but this sort of closed-end fund doesn't normally see this kind of volatility, and a quick perusal of the credits in their latest disclosure leads one to wonder: does someone smell smoke - serious smoke - in enough of this fund's exposure to be willing to accept a price SOME TWENTY PERCENT OFF ITS CURRENT TRADING LEVEL to get out RIGHT NOW?

Sure looks that way to me......

(At a dividend yield of 11.8% it's pretty tough to argue that you're not taking significant risk in this thing.  Bill Gross and PIMCO always seem to have the inside edge for some odd reason.... until they don't.  Is this one of those times?)

Hattip Zerohedge for the original look....

This is a problem....

The Federal Reserve Board on Wednesday announced the issuance of a consent Order to Cease and Desist against Credit Suisse AG, Zurich, Switzerland. The Order requires that Credit Suisse improve its program for compliance with U.S. economic sanctions requirements on a global basis.

The Swiss Financial Markets Supervisory Authority, the home country supervisor of Credit Suisse, has agreed to assist the Federal Reserve in the implementation and supervision of the Order.

And....

Dec. 16 (Bloomberg) -- Credit Suisse AG agreed to pay $536 million to settle claims the bank helped process payments that let Iran and other nations avoid government sanctions and gain access to U.S. financial markets.

The Zurich-based bank entered into a deferred prosecution agreement in settling with the U.S. Justice Department, which said Credit Suisse made more than $1.6 billion in illegal transactions involving Iran, Sudan, Burma, Cuba and Libya from the mid-1990s through 2006, according to a court document filed in Washington today. The agreement also settles claims by New York prosecutors, the Federal Reserve and the U.S. Treasury Department, the bank said today in a statement.

WTF?  How the hell do these people still have a banking charter valid in the United States?!

I am going to simply opine to the same effect as I have repeatedly.

AGAIN: IF YOU SEE ONE, THIS IS WHAT'S BEHIND YOUR CUPBOARD DOOR:

I'll tell 'ya what - I think there is nowhere near sufficient appreciation of the credit and regulatory problems that have been hidden from view and ignored by investors, especially those headquartered and primarily operating in Europe.

I will repeat what I have said across the board on this "financial mess":

IT IS NOT OVER, THE SYSTEM IS NOT STABLE, WE HAVE FIXED NOTHING AND IN FACT HAVE MADE THE SITUATION WORSE BY ALLOWING MORE HIDING AND LYING OF THE TRUTH.  THERE WILL COME A DAY - AND NOT ALL THAT FAR IN THE FUTURE EITHER - WHEN WE WAKE UP TO LOCK-LIMIT DOWN AND ONE OR MORE MORE IMPLODED "TOO BIG TO SAVE/FAIL" BANKS.

Tee Hee..... I was wondering if they'd pay quietly:

Dec. 15 (Bloomberg) -- Citigroup reported that an arbitration claim was filed against it today in New York by the Abu Dhabi Investment Authority, which purchased equity units from the company in November 2007. The units obligate the authority to purchase a total of $7.5 billion of common equity on specified dates in 2010 and 2011. The arbitration claim alleges fraudulent misrepresentations in connection with the sale and seeks rescission of the investment agreement or damages in excess of $4 billion.

Let's remember when November 2007 was.

• "There will be no recession": Ben Bernanke
• "Subprime is contained": Ben Bernanke .et.al.
• "The fundamentals of the economy are strong": Treasury and Bush

And of course lots more.

Let's also talk about what wasn't commonly known - off-balance sheet trash, HELOCs behind liar loans that only possible to pay off if the house price continued to go up yet were rated "AAA" and more.

Should Abu Dhabi have known about this?  Maybe. 

Was there fraud - that is, misrepresentations of known facts by Citigroup? 

Here's what I said about the deal at the time:

Citibank gets roughly $8 billion in an equity infusion from the Arabs. But it is a convertible preferred offering, although they structured it in a way to not say that (calling it a sale of "unit investment trusts" instead) and was made at a Guido-style interest rate of 11%. While there are allegedly anti-hedging provisions in the deal, anyone who actually believes that the folks over in Dubai don't have an affiliate that they can hedge through has rocks in their head. Some or all of that risk will almost certainly be hedged off immediately, and that coupon is insanely lucrative - for Dubai. Oh, if you just want to look at this as a discounted stock purchase (that is, roll the coupon into the stock price) it marks Citibank's stock in the low to mid $20s. That's nice if you're a current shareholder, no?

When you have to pay a higher interest rate than some of us have available on our credit cards, something serious is going on in your company and it ain't good!

Looks like Abu Dhabi didn't hedge!  I was wrong on that point - these folks are more stupid than I believed.  So much for "Arab Intelligence"; this reflects rather poorly on the rest of Dubai and Abu Dhabi, unfortunately.  If their diligence was as good on the rest as on this deal, well...... (and note that I called "BS" on it at the time!)

Read the rest of that Ticker and then tell me that it was a good time to buy Citibank stock - stock that was, at the time, trading right near $30/share.

It's $3.50 now - that's a damn fine loss you got there boyz!

By the way, for those who say that the Arabs couldn't have reasonably known about the embedded losses in HELOCs and other fun stuff (including the things that are sure to boomerang now that the FAS changes are taking effect) you might want to look at the ticker from just a couple days later in which I reported:

E*Trade gets a Guido loan and marks to market their entire ABS paper - at a SEVENTY PERCENT DISCOUNT!

I don't think anyone is (yet) understanding the impact of this.

Most of E*Trade's portfolio was HELOCs; there were few purchase-money firsts in there.

All I can do is shake my head.  None of this stuff was a surprise to anyone with their ear to the ground - or a nose for digging around a bit.

How many of you toss $7.5 billion around like used toilet paper?  Well these guys apparently did, and now they're bleating that they did what looks to be zero diligence or willfully and intentionally ignored that which was reported in multiple places, including in The Ticker.

They may win their arbitration case, as who knows what reps and warranties Citi offered.  That will be the deciding point, I suspect.

But this much is certain - when you loan a supposedly "great credit risk" money at 11% - when the asset markets are open and high-quality credits are trading in the 6s and 7s - the borrower paid you an outsize return for some fundamental reason.

The reason is probably because they got stink-butt.

I dunno....

The fund converted preferred securities of Citigroup that it purchased for $3 billion last year into common shares and sold them, making a profit of $1.1 billion, KIA said in an e- mailed statement today.

Nice profit but....

• The UAE has a chunk of "mandatory convertible" that is going to go off around $31.  With the common at $4.  That's not so smart.
  
  
• Citibank allegedly has significant (high single-digit billions) exposure to Dubai - and that may be a zero.  The fate of that position is, at present, unknown.

Now let's look at the facts here.  Citi in 2007 - just before it all came apart - negotiated a capital raise from the Abu Dhabi sovereign wealth fund with that mandatory conversion "option."  Those folks are going to get absolutely screwed on the conversion, buying $4 stock for $31.  I'd be rather pissed.

Why?

Well, you don't think Citi was exactly straight with those folks as to their exposure, do you?  It's not like they didn't know they had a metric buttload of off-balance sheet trash laying around, never mind all the other fun stuff like credit card lines and such.

I don't know what to make of all this, but if I had to guess the Kuwaitis know something's afoot here and have every intention of getting while the getting is good.  If Citi stock was going to go back to $30 in the next couple years - or even only to $10 or $15 - they'd be nuts to sell it now.

Of course if it's going to zero, and they know that because one or more little birdies tweeted in their ear and expressed how upset they were at being flim-flammed.......

Anyway, this is all conjecture - I certainly have no inside track with Citibank or the Arabs.  But this much is certain - with a 30% gainer and the potential for a 200% or more gainer if Citi stabilizes and prospers, why bail off in the entirety now?

I smell a rat.