News&Notes: Paper Burning = Gold Buying, Citi Bailout, Hedge Fund Redemption & Redstone Ruin

RCM Comment: Read the next three stories and then ask yourself: Can I smell the paper burning? Gold rallied over $50 on Friday and is called another $12+ higher this morning.

Obama eyes $500 billion in Stimulus; Paulson weighs ramping up aid again - WSJ
WSJ reports aides to President-elect Barack Obama and President George W. Bush are rushing to craft measures to shore up financial markets and prevent a policy vacuum from further harming the economy during the transition of power between the two men. Mr. Obama's team is putting together a new economic stimulus plan containing more than $500 billion in federal spending and tax cuts over the next two years, Obama aides and advisers said Sunday. That package would be far more aggressive than anything envisioned during the campaign. Democratic leaders in Congress are preparing to rush passage shortly after New Year's to have a stimulus-plan bill ready for Mr. Obama to sign once he is inaugurated Jan. 20. Meanwhile, Mr. Bush's outgoing Treasury secretary, Henry Paulson, is now considering a more activist stance in his final weeks in office than he had signaled as recently as last week. He is considering tapping the second half of the government's $700 billion financial-industry rescue fund, and rolling out new programs in response to worsening market conditions, according to people familiar with the matter. Among other things, he is seeking ways to make it easier for households to borrow money. He is also looking for ways to reduce the burden of foreclosures on homeowners.

Dollar slides versus yen, euro as US recession concerns mount - Bloomberg.com
Bloomberg.com reports the dollar fell for a second day against the euro on speculation a U.S. housing report today will add to evidence the world's biggest economy is in a recession. The currency also slid versus the yen on concern home-loan defaults will climb, adding to $967 bln of losses at financial institutions that led to a government bailout of Citigroup (C). U.S. data may show home resales dropped the most in a year in October, fueling expectations the Federal Reserve will add to last month's two interest-rate cuts to spur growth.

C Citigroup adds $40 bln of capital benefit through agreement with U.S. Treasury, Federal Reserve, and FDIC (3.77 )
Co announces that it has reached an agreement with the U.S. Treasury, the Federal Reserve Board, and the FDIC on a series of steps to strengthen capital ratios, reduce risk, and increase liquidity. The U.S. Treasury will invest $20 bln in Citi preferred stock under the TARP. Citi will issue an incremental $7 bln in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 bln of securities, loans, and commitments backed by residential and commercial real estate and other assets. As a result of the asset guarantee, the $306 bln portfolio will have a new risk weighting of 20%, thus freeing up an additional $16 bln of capital to the co. Citi will issue warrants to the U.S. Treasury and the FDIC for approx 254 mln shares of the common stock at a strike price of $10.61. Citi also has agreed not to pay a quarterly common stock dividend exceeding $0.01/share for three years effective on the next quarterly common stock dividend payment. Citi's Tier 1 capital ratio for the third quarter ended September 30, 2008, on a pro forma basis, for the October TARP capital injection and the new capital generated by today's announcement, subject to Federal Reserve Board approval, is expected to be approx 14.8% and its TCE/RWMA ratio would be approx 9.3%.
RCM Comment: This bailout deal will not help the liquidity crunch. This preferred stock investment is like a long-term loan and so the $40 billion will not be leveraged and loaned out. This may help stablize Citi, but it will not compel Citi to extend credit which is the crux of the issue.

RCM Comment: The redemption and repatriation wave we have been writing about continues as the following story suggests.
More hedge funds expected to succumb - WSJ
WSJ reports this has been the toughest year on record for hedge funds. Several factors suggest it could get even worse. In recent weeks, many hedge funds have been stockpiling cash in the hopes of stanching losses and having the wherewithal to satisfy investor redemptions. Some hedge-fund managers had hoped investors might reverse their withdrawal requests if the market improved. But amid the past week's rout (even with Friday's gain), and a steady redemptions drumbeat from pension funds, endowments and others, there is a sense that more hedge funds will have to close.

RCM Comment: This Bear has spared no one.
Share declines pressure Redstone - WSJ
WSJ reports the latest rout in Viacom (VIA.B) and CBS shares, which sank to new lows this week, is turning up the pressure on Sumner Redstone as he battles to resolve his family's debt problems. Mr. Redstone startled investors last month by dumping $233 million of his stock in Viacom and CBS, which he controls through his family holding company, National Amusements. The move was a bid to fix his debt problems after the stock market lurched lower and National Amusements breached an asset-to-debt covenant. But it didn't work, and his family has since been in urgent talks with its lenders about restructuring a $1.6 billion debt pile. Investors in Viacom and CBS have grown increasingly concerned that Mr. Redstone will have to sell more stock in the two companies as market conditions worsen. Mr. Redstone has said repeatedly that he doesn't plan to sell any more stock in either. While the banks can't force Mr. Redstone to sell more stock, because the debt isn't secured, the plummeting value of his assets could give him less wiggle room in negotiations with lenders. Mr. Redstone is expected to have to sell some assets as a condition of a restructuring, according to people familiar with the situation. If the banks pulled the plug on the debt now, National Amusements would likely have to file for Chapter 11 bankruptcy-law protection, people familiar with the situation said. But while the banks are under pressure themselves, that scenario could ultimately prove a bigger headache than a restructuring, and it's not currently on the table, the people said. Still, the discussions have some distance to go, and the outcome remains uncertain, they said. While the two sides have made progress, the negotiations are going slowly, the people said, in part because the lenders are juggling a string of other negotiations. Among asset sales being discussed is the family's closely held movie-theater chain. The two sides are exploring a way to sell assets over a longer period of time to avoid fire-sale valuations.