New column: Citi's tales of woe

Justin, what does all of this mean to the average Jane? By that I mean someone who has a staid fixed-rate mortgage (or no mortgage at all), no other direct real estate exposure (but of course having shares of various funds in a 401K), pays off credit cards, and works in a professional but not particularly lucrative job in a marginal industry (kind of like you, if I may be so bold). Fewer new job opportunities, lower raises, a slightly worse chance of holding onto the job, and lower returns on that 401K for the next couple of years, those seem apparent. Anything else?

I think that's about it. Plus the somewhat positive result that this Jane won't be competing to buy stuff (houses, mainly) in a market skewed by buyers bearing loans they can't really afford.

Thank you. Pardon me for asking the obvious: so what's the big deal? Are we fixated on the financial industry giants as we are on Hollywood celebrities? Are we concerned for the minority whose greed caused them to intentionally take on loans that they had no realistic chance of paying back? Or for the much smaller minority who were clearly deceived, or had a setback at the same time the housing market went south? Or are we making a big deal out of a little deal (a popular financial tactic too)?

Here what I don't get...

Citi became the leading marketer of the CDOs, right? So why are they sustaining such large losses? Were they marketing the CDOs to themselves as well? Did they offer some kind of guarantee to the investors who bought the CDOs? (unfortunately, the article doesn't really explain why Citi is suffering losses...)

As best I can tell, they got stuck with a lot of product on their hands when the cycle turned and nobody wanted to buy it anymore.

Why are companies adjusting rates if they know people will not be able to pay the new rates? Does it really make sense to kick a family out and have an empty house sitting on the block for months, possibly years?

It seems that it would make more sense to let the family stay and pay the low rate and just extend the loan. This way, the lender still makes money from the house and will not be stuck with a house that sits and will need repairs.

Peter asked what all this means for the average Joe or Jane, and you suggested "not much", Justin.

But isn't there a worry over municipal bonds? Let's face it, no-one wants to pay higher taxes, so municipalities have sought to find ways to do more with less. Instead of raising property taxes, the council members have chased higher interest rates & dividends in the money markets. They've been constrained, admittedly, to only buying AAA paper, but now they're seeing that AAA stuff turn to dust.

The average Joe or Jane couldn't care less about Morgan Stanley, but they will care when the local county goes bust and the garbage doesn't get collected, and Junior's school closes, and the street lights go off. Isn't this a concern, or have I got it all wrong?

Hi Justin - Add this to the list of things I don't get. Much of the news seems to center around the contention that no one knows what subprime bonds and other instruments are worth, and that Citi and others may have to sell them for next to nothing. I get the first part of that; the underlying value of those bonds is dependent upon what proportion of those mortgages get paid off (with respect to whatever tranche those bonds draw from).

But I don't get the second. If the market for these bonds with little information is small to nonexistent, why should Citi, BOA, and others try to sell them before they mature and determine true value? I realize they still may have to write them down, but at maturation they just might be in for a pleasant surprise. Why do we have to worry about creating a market?