Dear Citigroup

Dear Citigroup,

In these turbulent times who doesn’t need additional capital to get through these cold winter months? Because of your strong record of providing banking services to me, I would like to offer you a special opportunity to raise capital and gain liquidity in one easy step.  This offer is available only to you, and it is only available for a short time.

As you know, you are the proud owner of my mortgage.  As a result you receive several thousand dollars a month from me. I am sure this helps your income statement! I am a great credit risk and this mortgage should be providing you with a great return. Sadly, I am guessing that you, like many banks in these hard times, have actually lost a lot of money on my mortgage. (Phooey on those mark-to-market rules.) We both know the troubling fact is that market values of mortgages have declined precipitously, and as you well know, my mortgage is a nonconforming mortgage.  Even some AAA mortgage backed securities are trading at steep discounts, something like 50 cents on the dollar. This puts the market value of my mortgage at around half the outstanding balance.

But I am willing to buy my mortgage from you at above its market price! I am offering to buy that asset that is stuck on your books at about 50 cents on the dollar for 60 cents on the dollar. That’s right, you can sell an illiquid asset, gain hundreds of thousands of dollars in liquidity, and lower your risk of bankruptcy with one easy transaction.

In the future, you will of course not get my loan payments, but once you have sufficient capital, you can turn around and make a very similar mortgage loan at any point – rates are even currently very similar to my current rate.

So don’t sit around waiting for a government bailout! Make you and your stockholders happy. Call me now to take advantage of this exciting offer.

Originally published at Everything Finance – Kellogg School’s Finance Department Blog and reproduced here with the author’s permission.

2 Responses to "Dear Citigroup"

  1. Anonymous   January 10, 2009 at 10:06 am

    “I am a Citibank serf ! ”So proclaimed my neighbor as he exited his house one morning on his way to work.“They got me, it’s official, I’m condemned to serfdom, the big bank just sent me an e-mail on my Blackberry. “ he sighed.“You’re crazy” I said.“Oh yeah? Well, Citibank has my mortgage, they have my credit cards, they have my auto loan, and they bought the company where my retirement account is. What they don’t have of mine, JP Morgan does.”“A plague on both your Houses!” he shouted. A neighbor walking her dog looked on in alarm. “Everyone thinks Big is good.” he lamented “Big is not good. Big makes me even smaller.”“22,10,9,8,6.25 and 2” he continued.“What are those?” I asked.“Credit card interest, car loan interest, equity credit line interest, my student loan interest, mortgage interest, and the last number is the interest they pay me on my money market.”He turned to me and confided: “I will have to work until I die and thanks to modern medicine I will live an additional 40 years longer than any serf in history.”“They have me, and soundly too! “ he moaned.“Calm down” I said “It can’t be that bad”.“Ha! Says you. I get up at 5:30 every morning. I’m at the train by 6:30, then I’m off to the salt mine. By 7:30 I’m already knee deep in salt and it doesn’t let up the whole day. I return by seven. What’s twelve hours between non-equals?“That’s a lot” I sympathized.“By the time I get home” he added “my kids are back from school and already have almost four hours of video game playing done. I hope the next war involves thumbs because we will definitely win!”“Did you know in the Middle Ages” he continued “there were so many serfs they devised a serf class system? Rated from top to bottom you could be a Freemen serf, a Villeins serf, a Cottager Serf, or a Slave Serf. Did you further know that serfdom was abolished in Russia in 1861 but continues to this day in America? Without rankings!” he steamed.What about you, retailer?” he asked.“I’m self-employed” I told him. “ I set my own hours”.“Yeah, I don’t think so” he shot back “Retail is like being in jail with the door open, you think you’re free to leave your store anytime, but you just can’t seem to make it out.”“Why didn’t I listen when my friend told me reading is for losers” he added “I now need to know how to spell only two names: Citibank and JP Morgan. And that’s just to set up their direct debits to my checking account. I never see my paycheck and I never make my own payments, yet somehow they tell me it’s my money.”“They have made worms’ meat out of me!” he exclaimed.“Still and all, serfdom’s not so bad, I guess” he said, a little more chipper. “You know what my son said to me this morning before I came away?”“No, what?” I asked.“You suck Dad. Can I have 5 bucks?”And with that he was off.

  2. Jonathan Parker   January 12, 2009 at 10:45 am

    So why isn’t Citibank sending letters like this to people like me, but offering us the opportunity to buy back our mortgages at 90 cents on the dollar? Is there a market failure? Is Citibank stupid? I see three answers.First, Citibank may only service my mortgage or only own a piece of it. If there are a large number of owners of a tranched mortgage pool of which mine is a small piece, it may be hard to co-ordinate those owners to make these offers. Doubly hard if one of the owners owns only the last ten cents to be recovered on each dollar, since that person would lose everything under the 90-cents-on-the-dollar buyback plan.Second, Citibank owns some mortgages that will be paid off in full and some that won’t. They are not sure which is which. If they send the letter out and the only people who take their offer are those who would have paid off in full anyway, then they have written down only those mortgages they did not have to, and continue to be stuck with exactly those mortgages that will not perform in the long run.Third, Citibank may be counting on government assistance. If they can get bailout funds, then they can ride out their cash-flow problems and see what happens with their pool of mortgages. If they turn out terribly, the government is there to help. If they perform pretty well, then Citibank’s managers and stockholders make profits. So the government may be slowing private sector responses, and so taxing me to pay Citibank so they do not write down my mortgage. Ugh.