Between a rock and an accounting rule

Naked Capitalism makes two interesting points about Citi:

• Reading the Wall Street Journal we find:

  Citigroup's subprime exposure -- and source of its problems -- are two big buckets that together total $55 billion, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans that were being held, or warehoused, until they could be added to debt pools for investors. The second, totaling $43 billion, covers so-called super-senior securities.

  This position is larger than Merrill's and so we can expect further very chunky write-downs from C at some point.
  
• Moreover unlike mother M., Citi does not appear to have done much to reduce its position. Why might that be? One possibility is that if Citi had sold, they would have had a mark, and that mark in turn would have had to have been used for the same assets in their conduits. Those conduits would then have missed the OC tests, forcing Citi into the unpalatable decision between providing them with implicit support or suffering the reputational damage of not doing so. If this really is the case, Citi is going to have its work cut out staying afloat as these securities decline further in value.

It is worth thinking about what would have happened before securitisation. Had Citi had the same assets then, they would all have been on balance sheet in the banking book, and hence not marked at all. They would have had considerable discretion about the size and timing of loan loss provisions, and the only write-downs would have been from actual experienced losses. In short we would not have had any real idea of how bad the problem was. I rather prefer it this way round.