Word: defaulting
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Dates: during 2000-2009
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...last week, events took a turn for the worse. Negative reports on consumer default rates and troubling statistics on commercial loans unnerved investors. Two moves by Citi - taking $80 billion in risky assets off the auction block and transferring some mortgage-related securities held in an off-balance-sheet vehicle back onto its books - spooked shareholders already wary of what unknowns might be lurking. On Nov. 18, the company announced that it would be laying off about 50,000 of its employees, or 20% of its global workforce...
...beginning of October. So erase $5.8 billion in equity right there. Citigroup was also a player in advising private equity companies on leveraged buyouts. As part of that business it lent money to the companies in such transactions. Now many of those deals look over-leveraged and ready to default. Those bonds are off 19% since the end of September. Citigroup holds $23 billion in leverage loans. So mark down that stake by $4.4 billion...
...Next, the government could suspend trading in the credit default swaps on Citigroup's debt. The price of those contracts, which pay out if Citi goes bankrupt, have been rising recently, and that is spooking the stock investors. Without that constant reminder of the increasing chance of Citi going out of business, some observers say the stock would rise...
...despair. "The credit-card industry is being likened to what has happened in the mortgage industry," says Greg McBride, senior financial analyst at Bankrate.com, a personal-finance website. "I don't see how the two should be mentioned in the same sentence." He reasons that even if credit-card defaults reach a record high of 10% of the $970 billion in revolving debt, a chunk of that total will get paid off in full every month, which would result in an aggregate default of less than $100 billion. That number doesn't come near the losses that have occurred...
...these transactions may be small, but funds multiply them many times over by leveraging their investors' capital. This strategy can go awry - as it did spectacularly in 1998 when Long Term Capital Management, a giant U.S. fund whose founders included two Nobel laureates, lost $4.6 billion after Russia defaulted on its government bonds. Long Term Capital Management was heavily leveraged. It had equity equaling only 3% of its assets. That's the equivalent of a $3.3 million home-equity loan on a $100,000 house. When the market turned skittish after the Russian default, the fund had to rapidly unwind...