22 November 2007

Citibank SIVs Hit Norway Townships

by Mike Shedlock

Several Norway townships are caught up in the international credit crisis.

Several small townships in northern Norway went along with a securities firm's advice and invested as much as NOK 4 billion in complicated American commercial paper sold by Citibank. They now risk losing it all.

The township politicians are both embarrassed and angry at the financial advisers who they now claim led them astray. "They think we're a bunch of small-town fools," one local mayor told newspaper Dagens Næringsliv.

Officials in four northern Norwegian townships (Narvik, Rana, Hemnes and Hattfjelldal) went along with an alleged recommendation by Terra Securities to invest a total of NOK 451 million in what they're now calling "high-risk structured products" offered by Citibank and sold for Citibank by Terra.

To boost returns, the Norwegian townships also borrowed NOK 3.5 billion to invest in Citibank's products, which later lost as much as 50 percent of their value because of the US credit crunch.

By now it should be clear that Asset Backed Commercial Paper ABCP problems are likely to turn up anywhere and everywhere.

Here is a small sampling:
Two Bear Stearns (BSC) Hedge Funds went to Zero
Two Hedge Funds in Australia liquidated
Money has been frozen in Canada including the Yukon
US and Canadian pension plans are affected
Two banks in Germany were bailed out by the ECB
Norway Townships borrowed money to invest in this mess
Citigroup (C) and Merrill Lynch (MER) both lost their CEOs over this mess
Hundreds of $billions in potential losses are still circulating

The latest news in the US is that SIV debts are hiding in scores of public school funds and close to a $billion in defaults losses had not even been disclosed as late as a week ago even though this mess has been brewing for six months. See SIV Debts A Disaster For Public School Funds for more on this story.

Very Expensive Lessons
Don't chase yield
Don't buy something you do not understand
There is no free lunch
Rating agencies opinions are essentially worthless because they are never timely enough and because their business model creates enormous credibility as well as conflict of interest issues
Don't trust Citigroup, Bear Stearns, Merrill Lynch or anyone else hawking debt

That last point is critical. Lack of trust will impact Citigroup, Bear Stearns, and Merrill Lynch's credibility, as well as their ability to raise capital for years to come. Trust once lost, is not easily restored.

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