BACK UP

Sorry about yesterday, but some things can't be helped.

So tomorrow the Spanish sally forth into the medium term range on a new basis. Usually, sovereign bonds in Europe are sold very much like they are in the United States, essentially on a "Dutch Auction" with the issuer accepting the best bids for the amount of the issue. Over here, we have what is known as the "primary dealers," a list of--I believe--19 institutions who are committed to bid on every issue of U.S. government debt. Obviously, the bids are based on the perceived demand from investors. It is a very sophisticated, professional and stressful business. Don't bid and you're out, and through the years there have been fewer and fewer members of this exclusive club as it has become harder and harder to make money.

Europe is somewhat different inasmuch as there is no primary dealer list; institutions can bid or not bid as the case may be depending only on their appitite and the appitite of their clients. So it was quite surprising when Spain moved from the traditional method of issuance to the announced formal underwriting of tomorrow's issue thereby guaranteeing it's success albeit a a price that might well be higher than that under the standard model. Why? Two reasons I suspect. First to insure success of the issue and second? I would be willing to bet that the underwriting institutions were considerably more reluctant to take on the risk of the issue without the additional compensation that an underwritten issue would carry by way of coupon and most importantly, fees. We've come full circle. 30 years ago the Underwriting Syndicate was the method of doing business; the "Dutch Auction" was anathama to the large Euro banks who ran the business. In 1980, my institution participated in a Dutch Auction on behalf of the European Coal and Steel Community--the "triple A' of all "triple A's"--which was boycotted by the Euros. I was "only" for $100,000,000, but that was a lot of money in those days. I remember filling in on the trading desk after the issue began trading and receiving multiple calls from the biggest of the big Euro players, UBS.

"ECS?"

"99 1/2...3/4 (well within commissions)

"at 1/2 I sell 4 million."

"Done, I buy 4 million at a 1/2"

It went on like that for three or four days and we bought 12 million of the issue from UBS and never moved the price. The were obviously short and trying to crash the issue. I was on the desk another afternoon when they came on and thought I would have a bit of fun.

"ECS?"

"To you Squire, 98 1/2--par 3/4." There was a long pause.

"What the hell do you think you're doing?"

"Me job. Maintaining a market and supporting the issue." What they didn't know was that WE were being backstopped by the issuer who wanted to teach the Eurobanks a lesson.

UBS and a couple of other banks with whom they were working were desperate to cover the short but as the issue was only a $100,000,000 and there was only three banks in the syndicate and as we owned HALF the issue...things were very tight indeed. I always wanted to be in on that call when we "bought them in" to cover the delivery of their sales at something like par + 50 but they leaned on Citibank who owned 25% and Citi loaned them the bonds. Damn!...but the ECS took away the free lunch.

But that brings me to the rather dismal performance of our friends at Citi in the fourth quarter. Revenue stank as did trading performance particularly in fixed income like everybody else. Additionally, for the first time I can remember, they backed out reverves set up to cover expected losses which never materalized. Accounting rules require them to do this otherwise the performance would have been worse. The demand of the government on the accounting boys to maximize taxable income is not insignificant in this area. When the effect of the legislation know as Dodd/Frank begins to kick in later this year along with the now famous "Volker Rule," Bank profits, while not exactly hen's teeth will be challenged...assuming of course that anybody can figure out how to implement this horrific piece of legislation. But as I have said, Citi is at this time the only real international financial institution in the country and their strength is exactly where one wants to be: the emerging markets and the good ones for the most part. Nevertheless, profit for them as well is going to be tough to come by. Dodd/Frank, underwritten bond deals, institutions shinking in size and scope. Funny, after 30 years, maybe the Euros win after all.