The research arm of Goldman Sachs (NYSE: GS) is predicting that Citigroup (NYSE: C) will have to cut its dividend by 40% due to CDO write-offs of $18.7 billion. Goldman believes that Citi will need the cut to raise $6.2 billion in additional capital.

According to Bloomberg, the Goldman report said "It will be a couple of quarters before the current credit crisis is fully digested by the markets."

Keeping the dividend high makes little sense. The yield on Citi's stock is now over 7%. But, very few investors would put money into such risky shares to get a long-term high yield. An announcement of more significant trouble at the big bank could certainly drop the shares another 10% or 20%, making gains from the dividend appear modest.

Citi is no longer a stock that investors look to for a pay-out. It is a volatile investment which could gain a stockholder 30% over a quarter if the company sold a large division or had better-than-expected earnings.

Cut the dividend to get some dry powder.

Douglas A. McIntyre is an editor at 247wallst.com.

Last week, Citadel Investment Group, a Chicago hedge fund, bought E*Trade Financial (NASDAQ: ETFC)'s collateralized debt obligation (CDO) portfolio for 27 cents on the dollar according to The Wall Street Journal [subscription required]. If this price was applied to the Level 3 assets of nine of the largest banks, it would wipe out the capital of three of them.

It's important to point out, before presenting this analysis, that the 27 cents on the dollar price that Citadel paid applied only to E-Trade's CDOs. It may represent a worst case scenario price for these banks. Furthermore, the Level 3 assets of these nine banks include other illiquid securities besides their CDOs. Finally, the calculations I'll show are based on the most recent Level 3 assets and equity of these banks as of last month.

Having said that, here are the three banks whose capital would be wiped out if that 27 cents on the dollar valuation was applied to their Level 3 assets and written off from their most recent capital levels:

The Dow lost 237 points today according to The Associated Press. The stated causes?

• The HSBC bailout of $45 billion worth of SIVs
• Citigroup Inc.'s (NYSE: C) announcement that it would fire as many as 45,000 people
• The Fed's announcement that it would inject $8 billion worth of liquidity -- in the form of short-term loans -- into the financial system

The daily explanations of market movements are not really that meaningful. But I am inferring three very disturbing messages from these market moves:

• There are serious unrealized losses in the banking system as a result of their holdings of Collateralized Debt Obligations (CDOs) and Mortgage-Backed Securities (MBSs) that nobody wants to buy.
• The banks may not have enough capital on their books to take the big bath write downs needed to account accurately for these bad assets.
• The banks and the government are hoping that if they can stall for time long enough, the problem will take care of itself.

The market will keep dropping until these messages are no longer true. This could take years to clear up.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.

It looks like the Super SIV roadshow is about ready to start, with the Bank of America apparently taking the lead.

Left unanswered -- at least for the immediate future -- are compelling questions related to the fund's transparency, effectiveness, and cost.

The Bank of America (NYSE: BAC) announced Monday that it will lead efforts by Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) to convince smaller competitors to help finance an $80 billion bailout of the short-term debt market, Bloomberg News reported Monday, citing two sources with knowledge of the matter.

Most investors and readers are aware of the subprime mortgage-driven credit market slump. Lending to potential customers has declined substantially, from typical homebuyers to large corporations.

To be sure, the credit markets are not frozen, as they appeared to be during the August 2007 credit crunch and accompanying equity market sell-off, but lending requirements are much more rigorous today, following large subprime investment losses.

Speculative deals -- be it a large debt offering backed by mortgages, or a mortgage for a condominium project -- are not being approved. Two years or so ago, flush with cash and eager to take advantage of the yield spread, these type of deals undoubtedly would have received multiple funding offers from banks, mortgage companies, and other investment firms.

It's not every season that Wall Street analysts greet losses or write-downs with smiles, but such is the case in the 'subprime watch' era.

Barclays (NYSE: BCS) Thursday said it wrote-down $2.7 billion of credit-related securities tied to the U.S. subprime mortgage market.

Investors once again appeared to be relieved that a major bank's subprime losses, while not small, weren't catastrophic. Barclays' shares fell just 44 cents to $43.44 in mid-morning trading Thursday. Further, Barclays' shares are up more than 10% for the week, an indication that investors may be regaining an appetite for the United Kingdom's third-largest bank.

Bear Stearns' (NYSE: BSC) shares gained more than 5% to $106.45 Wednesday morning after the company said it would write down the value of it subprime-related assets by $1.2 billion in Q4.

Wall Street appeared to be relieved that Bear's announcement wasn't larger, sending BSC's shares up in both pre-market and mid-morning trading. Many analysts and economists had expected Bear Stearns to take a $3-$3.5 billion Q4 charge for the subprime-related assets.

While indicating that the past few months had been "very challenging," Bear Stearns CFO Sam Molinaro, speaking at a Merrill Lynch banking conference, said the company has reduced its holdings of collateralized debt obligations, the securities most impacted by the collapse of the subprime mortgage market, Bloomberg News reported.

Financial alchemy is the process of transforming something of little value into something worth much more. The unfolding crisis in global financial markets is a result of the unpaid price of that financial alchemy.

How does this medieval-sounding madness apply to today's financial markets? As this letter suggests, the financial alchemy took subprime mortgages, leveraged buyout loans, and other financial assets and turned them into Collateralized Debt Obligations (CDOs), many of which received AAA ratings from agencies such as Moody's Corp. (NYSE: MCO) and McGraw Hill Companies' (NYSE: MHP) Standard & Poor's (S&P), in a process of shopping for ratings which I described here.

The upshot is that investors in Asia and Europe -- eager for higher returns (estimated at 22 basis points above treasury yields) and comforted by the AAA rating -- recycled the cash generated from record energy prices and trade surpluses with the U.S. into these CDOs. There are roughly $2 trillion such CDOs outstanding against which those investors borrowed as much as 13 times the amount they raised in equity from investors, up from nine to 10 times as recently as late 2005 -- let's say $20 trillion -- to amplify the returns on the CDOs.

The New York Times [registration required] suggests that General Electric Company's (NYSE: GE) CNBC's Jim Cramer has had little effect on Fed Chair Ben Bernanke -- this despite his famous video rant in favor of cutting interest rates.

Cramer is used to having tantrums and getting his way. But his responsibility is limited to providing a unique mix of entertainment and stock touting. Bernanke, on the other hand, has a slightly bigger responsibility -- managing the first global financial panic of his 18-month tenure. To do that, he issued $62 billion of short-term government loans (known as repos) -- accepting mortgage backed securities (MBSs) as collateral -- in an effort to restore confidence to the markets.

Meanwhile Cramer is trying to get Bernanke to bail out his buddies at The Goldman Sachs Group (NYSE: GS), whose formerly eight-figure-bonus-worthy trades are now blowing up in their faces. Simply put, Cramer wants the Fed to grant Wall Street all the upside while shifting the costs of its mistakes onto society. But Bernanke does not want to play along.

The Bear Stearns Companies (NYSE: BSC) is striking fear into the heart of Wall Street. That's because it borrowed so much money to invest in Collateralized Debt Obligations (CDOs) -- packages of loans sliced by risk and interest rate paid -- backed by subprime mortgages. Bear's Bear will discuss why the average investor should care about the fallout from these bad bets.

The New York Times [registration required] reports that Bear Stearns put up $3.2 billion to bail out investors in one of its hedge funds -- the second biggest bailout since the $3.6 billion bailout of Long Term Capital Management in 1998. That after a largely behind the scenes scramble to keep a nasty secret on Wall Street from harming the reputations of all the investment banks who stand behind the market for mortgage backed securities.

The report suggests that the securities in which Bear Stearns invested represent a huge market. In 2006, $316.4 billion in mortgage-related CDOs were issued, about 77% more than in 2005. But the reason that this involves so many Wall Street players -- Merrill Lynch & Co. (NYSE: MER), Goldman Sachs Group, Inc. (NYSE: GS), and JPMorgan Chase & Co. (NYSE: JPM) -- is the phenomenal level of borrowing. The Wall Street Journal [subscription required] suggests that Bear Stearns borrowed a huge amount -- with only 5 cents worth of equity for every dollar of CDOs it controlled in one of its funds. In particular in February 2007, its High-Grade Structured Credit Strategies Fund had $667 million of equity and controlled $15 billion worth of assets.