Savings Experiment: Snow Removal
Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerWhen Citigroup Inc. (NYSE: C) reports tomorrow, one big question on investors' minds will be how big a charge against its earnings it will take for its Collateralized Debt Obligations (CDOs) and other Level 3 assets. The amount of the charge could range from $9 billion to $24 billion.
I appeared this morning on CNBC to discuss bank earnings with Charlie Gasparino and Andrew Ross Sorkin of the New York Times. I got into a bit of a disagreement with Gasparino, who reported earlier on the wide range of that charge. He thought that there was a strict amount for the charge. However, as I pointed out, Citigroup's Vikram Pandit wants to take a big bath write-down, but can only do so if he can raise enough capital to offset it. (Moreover, as I did not mention on the air, the very fact that Gasparino was discussing such a wide range of write-downs indicates how much management discretion is involved.)
I argued that since there is no active market for the Level 3 assets that Citigroup is writing down, there is significant management discretion in the amount of the charge. Management could base the write-down on the decline in the ABX, an index of subprime creditworthiness, or on the values that other institutions -- such as hedge fund Citadel -- have used, which range from 27 cents on the dollar to 45 cents.
I think the size of the charge will increase depending on how much of a capital infusion Citigroup can get. But Sorkin reported some bad news on that front; the Chinese government is now reluctant to inject $2 billion that had been expected, through China Development Bank.
If Citigroup can come up with enough capital, Pandit will take a proportionately bigger charge along the range from $9 billion to $24 billion. While Citigroup is probably reluctant to cut its dividend and make an enormous number of layoffs to conserve capital, Pandit could best serve investors by cutting out the maximum amount of the cancer that he inherited from Chuck Prince.
Unfortunately, $2 trillion worth of hedge fund money seems reluctant to help him raise enough capital to do that. So Pandit will need to spend more time in the Middle East to try to raise more. And we may learn how much more when Citigroup reports tomorrow.
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.
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Reader Comments (Page 1 of 1)
1-14-2008 @ 1:21PM
isoconsultants said...
You make an excellent point about the uncertain size of the write-down TBA by C. However, I think the very uncertainty of the write-down brings to light another important point: Namely, the fact that most of the recaptialization we are seeing in the financials is beyond the control of their managments (CFC - 'shotgun wedding' with BAC; MBI - '"AAA" 14% Notes' to placate Fitch; and, C's nearly comic attempts to match its losses to the legal requirements of its capital structure, etc.) and does not represent the true so-called 'kitchen sink' quater that is about to be called by the pundits.
So long as managment is being less than candid about losses in level 3 assets, or fighting to preserve a credit rating, or investing new money to merely attempt to save a bad bet, the bottom has not been reached. Morover, if GS economist Jan Hatius is correct in his recession call, the financials are having the table set for more losses in '08 -- both continuing losses in the CDO's and other (new) losses in other areas of their businesses.
1-14-2008 @ 2:57PM
wzweifler@zweifler.com said...
Continuance of the Citi dividend will be viewed as a return of capital. Until the charge-offs diminish or disappear the opportunity toi buy mortgage debt and tranches at deep discounts will continue. We want to talk to others who share our enthusiasm for this contrarian stragegy wzweifler@zweifler.com
1-14-2008 @ 3:12PM
Judy said...
Quit paying these CEO"s these enormously inflated salaries/stock options. They have more than proved they CAN NOT HANDLE the job....this will save the company millions and millions of dollars....TAKE BACK THE JETS that were parked in VAIL over the holidays, sell it...use the money ...
GET RID OF THESE CEOS's
1-14-2008 @ 4:14PM
makia3 said...
In the early 80s in Texas, we used to call this
funny money. There was even a book written
with that title at the time.
Have we learned anything?
NOPE!
1-14-2008 @ 4:35PM
Joe Cowan said...
So many banks-so few bankers
Joe Cowan
1-14-2008 @ 7:47PM
Sylvia Leftwich said...
For a new investor, would this be a good stock to buy, and at what level would you bloggers suggest would be a bargain price per share for this stock?