Citigroup (NYSE: C) may have a new leadership team, but don't expect any miracles [subscription required]. In a conference call yesterday with CFO Gary Crittenden and the new Citigroup chairman Robert Rubin, analysts were told that Citigroup would not be able to clean up its problems related to the mortgage and credit mess until the middle of 2008. Citigroup expects to write down between $8 billion and $11 billion in the fourth quarter, but that could go even higher.
Crittenden did repeatedly try to assure investors that the dividend level would be maintained, saying, "Based on our current assumptions, we do expect that we will be maintaining our current dividend level. We have no reason to think that is anything other than absolutely the case and we anticipate that we will return to the range of our targeted capital ratios by the end of the second quarter 2008."
The question is how sure are they? They admit that most of what has unfolded happened through the month of October and that the potential losses for Citigroup raked up by its banks and investment houses could total more than $30 billion. When asked by Mike Mayo, an analyst for Deutshe Bank, "In the terms of the charges, can you give us any assurances that there is not another shoe to drop?" Crittenden answered, "Well, no Mike, I obviously can't give you any assurances. By the very nature of what I have said through this call, we are making an estimate right now ..."
Mayo followed that up by asking, "Did some people on the Board step in and ask questions and become more aggressive in evaluating the risk?" Crittenden tossed that answer to Bob Rubin who said, "Yes, Mike, in the broad sense I would say that ever since the Board became aware of the problem the Board has been engaged with Gary, with the audit committee, and with people from CMB with respect to understanding these risks and evaluating them." Neither man gave any indication of how long the Board knew or when the Board became more aggressively involved.
The impressions left from this call were that this all unfolded in October. The $43 billion of what Crittenden called "super senior" debt was thought to be above AAA quality until the credit rating agencies started questioning its value and downgrading the underlying securities. Why was Citigroup counting so heavily on credit rating agencies to determine its own risk exposure? Shouldn't there have been stronger internal controls on risk assessment? Or is Citigroup's leadership just trying to shift some of the blame?
Well if you're a stockholder who bought Citigroup at its May 2008 high of $53.17, you're looking at a 32.5% drop in value. Citigroup stock closed at $35.90 yesterday. The last time its stock price was that low was in 2003. The Wall Street Journal reports today that several key analysts are recommending that you sell the stock quickly. Morgan Stanley's Betsy Graseck told clients to "sell into any rally" in Citigroup stock, according to the Journal. Goldman Sachs analyst William Tanona wrote to investors, "We wouldn't be surprised if additional write-downs were forthcoming."
Is it time to sell? That would depend upon your belief in the new management team's ability to turn this around. If you think it's another Enron, like Merrill Lynch's situation seems to be, then get out now, the stock price will only go lower. You can always get back in if you see positive signs.
Crittenden did clearly state that the SIVs were not included in the current calculations for write-downs and, as I've been saying, these SIVs are held off the books. What happens if and when they must be written down on the books?
Lita Epstein has written more than 20 books including "Reading Financial Reports for Dummies" and "Trading for Dummies."
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Reader Comments (Page 1 of 1)
11-06-2007 @ 1:09PM
bullmary said...
I am a retired Citibank employee who is also puzzeled by the lack of check and balances. At one time Citibank had a loan policy in effect which prevented them from heavily lending in any one area or country it appears that is was not in effect recently. In my opion this whole board was not prudent in their decisions and should be taken to task for their shortcomings. Just look at the makeup of the board and you realize why we are not doing well.
11-06-2007 @ 6:49PM
slessera said...
It was betrayal and total surrender of fiduciary responsibility for subprime motgages to have been issued to such an overwhelming extent. Clearly those who did so were motivated by their selfish desire to appear productive. For this they should be required to respond in damages well beyond the overinflated incomes they received.