Think folks.

Let's look at what's out there:

"Citigroup Inc. is in talks to sell $12 billion of junk-grade corporate loans to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person familiar with the matter said."

First, the alleged sale-in-process (which nobody will confirm) is at 90 cents on the dollar.

Second, these are loans made to the buyers that were made when these guys did LBO deals in the last year or so.

Circle, meet Jerk.

This is extremely bad for two reasons:

• Citibank was almost certainly carrying these loans at par (100) on its books. This is an immediate markdown of $1.2 billion if so.
• The only reason to sell these assets off at a discount like this if this is all you have that you CAN sell and you NEED to sell!

Is Citibank in ratio trouble?

Nothing else makes sense. They don't want to dilute shareholders (good) but they just sold off paper that should have been "money good" at a significant discount (very bad) and my money would be on that being, effectively, a forced sale (extremely bad.)

Now from the P/E guys this deal makes an insane amount of sense. They were in the position of first loss (typically 10% they put up on the transaction) which was looking dicier by the day. They just zeroed out their loss because they got the debt at a 10% discount!

This severely constrains their liquidity, but what other sort of deals are they going to be doing here for a while in a recession? None! So why not remove what is otherwise a certain loss and deploy that capital into assets they have control over (the companies in question.)

I think it makes all sorts of sense for Apollo, Blackstone and TPG, but it sure as hell doesn't for Citibank, unless they had no other choice.

My "10 cent back of the envelope" analysis - take it for what you think its worth, but I wouldn't be going anywhere near Citibank's stock.

UPS' earnings warning is FAR more important to the economy and the markets than this crap, and the downgrade from S&P on Mortgage Insurers - which came after the Citi "leak" - is a REAL bombshell, and not of the positive sort. Here's a tidbit:

"The agency said it now expects home prices to decline 20 percent from the peak in 2006 compared with an 11 percent drop it projected last November. It also sees unemployment rising to 5.8 percent in 2009."

Don't worry, its all good - go buy some stocks (sucker!)