Are Citi's Indemnifications Worth a Damn?
That's the value I would assign to the indemnifications Citigroup executives say cover 22 percent of their $504 billion mortgage servicing portfolio.
Note: In our earlier story about Citi's exposure to put-backs, we gave the bank full-credit for the indemnifications. But that was way too generous, in my opinion.
Why zero? Because Citi hasn't told us enough about the indemnifications to allow any other value.
An indemnification is only as strong as the party doing the indemnifying. If the counter-parties to Citi's indemnifications are financially shaky or, worse, bankrupt, it won't matter whether Citi has solid agreements with them.
Many mortgage originators have gone bankrupt. Yesterday we learned that bond insurer Ambac is headed for bankruptcy. The financial sector is overflowing with weak companies.
Twenty-two percent of $504 billion is a very large number. If the indemnifications are concentrated in a small group of companies, Citi could wind up wiping out even strong companies if it calls on them.
I cannot say whether the indemnifications Citi has are from weak or strong companies. I cant say whether they come from diverse group of companies or from a highly concentrated clique.
I can't say much about them because Citi won't say much about them.
They're a blackbox. We're expected to take it on faith that they will work.
If you're a faith-based investor, go ahead and assign the indemnifications 100 cents on the dollar. I'm a skeptic. Until I get more information, I'm valuing them at zero.
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