Citi's Liquidity Plans Draw Poor Reviews

"He who has capital in a period of illiquidity is sitting pretty."

So says a writer at the Daily Deal. I cite it here because it makes a very good point.

Citigroup, in its quest to raise cash, reportedly agreed to sell $12 billion worth of its leveraged loans for 90 cents on the dollar. But the Deal is saying the loans are being bought back from some of the same private equity firm who landed them on Citi's books the first place.

Buyout veterans have been openly salivating for months at the chance to snap up debt they view as wildly underpriced. Until now, however, it was hard to find willing sellers... The firms reported to be taking the leveraged buyout debt off Citi's books -- Apollo Management LP, Blackstone Group LP and TPG -- all have experience investing in turnarounds.

Some observers saw in this announcement the deft moves of a shell game. Mish's Global Economic Analysis had this to say:

What this did was muddy the waters. Citi had to indemnify the buyers from the first 20% of the loss so Citi effectively got somewhere between 70 and 90 cents on the dollar for those loans. We will not know the exact amount until a later date ... It appears that Citi is setting up a con game in which they may pretend they got 90 cents on the dollar when they really didn't.

Yes, there is a market, at the right price. There's a market for anything, anytime, at the right price. And the price in this case was a 10% guaranteed markdown plus a free PUT option that has the potential to make the total markdown as high as 30%. And Citi had to agree to finance that!