Learning that we never learn: Citibank

March 27, 2008

“Education costs money, but then so does ignorance.” - Sir Claus Moser

Phew…Only $1.66 billion. It was only a short time ago that a billions dollar payment would be a big concern. Remember back to the 1998 collapse of Long-Term Capital management when an initial $1.8 billion hedge fund loss announcement lead to a global meltdown? I suppose that it was different as it was a decade ago and the dollar was worth a lot less back then. Then again….

The recent news of the Enron settlement by Citigroup (C) would normally cause a substantial stir and a marked concern by investors. But the truth is that this is a drop in the bucket compared to the real write-downs we are witnessing.

Citigroup settles with Enron creditors - International Herald Tribune

Citigroup said Wednesday that it would pay $1.66 billion to the Enron Bankruptcy Estate, which represents creditors of Enron, the energy trader that engineered one of the biggest U.S. corporate frauds. With a trial scheduled for next month, Citigroup was the last of 11 financial institutions to resolve claims going back to 2003. Citi’s shares fell $1.37 to close at $22.05.

Ironically, the Enron collapse was also due to derivatives, leverage and off-balance sheet arrangements. Sound familiar? I thought we had learned our lesson from that? The Enron, LTCM, and subprime are all the same animal, just in a different flavor. AND, touching the hot surface has not helped keep us out of the fire as we (investors) are lied to, over and over again..and apparently very stupid.

The most troubling news though is not that John Meriwether’s hedge fund is seeing record number of outflows related to a 28% loss in his Relative Value Opportunity fund has seen in 2008. Rather it is that after the amazing loss and market turmoil caused by his last fiasco, that his funds would ever see the inflows to begin with.

What do you think…have we learned our lesson?

Disclosure: No Positions in stocks mentioned.

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Written by Andrew Horowitz · Filed Under Economy, Short Ideas, Stocks 

Comments

4 Responses to “Learning that we never learn: Citibank”

  1. Paul on March 27th, 2008 3:16 pm

    I’ve been investing in selling covered strangles on the S&P and other internatinoal markets for six years. I’ve stopped because of concerns about a big crash this year. What are your thoughts on buying puts on the S&P or Dow into rallies. If the market does have another major correction, this strategy could deliver significant returns. My thinking is that if the market doesn’t drop big time, it will fall at least as many times as rally, so the net cost would be limited.

  2. Andrew Horowitz on March 27th, 2008 6:06 pm

    Paul:

    At this point, there is limited risk if done correctly it seems….both sides..

  3. Matt on March 27th, 2008 7:09 pm

    Then there was the savings and loan scandal in the 1980s where someone would open up a bank, take deposits and “lend” all the money to his friends, then go out of business and the tab would be picked up by the FDIC. Neil Bush (the presidents brother) was involved in that one.

  4. Ian on April 12th, 2008 4:03 pm

    Having just finished Lowenstein’s book on LTCM, it did astound me that Meriwether managed to set up shop again so easily. I guess history does and always will have a way of repeating itself in many ways

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