Back in mid-December 2007, Citigroup (NYSE: C) was trading at $30 a share and I posted that it might be a buy at $15. But that was before the financial crisis reached its current stage of utter desperation. Like the co-dependent family of an alcoholic, the government has tried to pretend that things are fine with the banking industry between episodes of bone-chilling panic. This comes to mind in watching Citi's 17% plunge yesterday.
The question now is whether Citi will be the biggest of the financial catastrophes. You probably recall last fall when a financial institution's stock would plummet on news of a potential credit downgrade, which would lead the short sellers to pile on and worried customers to rapidly withdraw their money. That, in turn, would lead Credit Default Swap (CDS) holders and lenders to ask for collateral payments, which the financial institution didn't have. And voila, the stock would plunge until the government rescued the financial institution (Citi), it failed (Lehman Brothers), or an acquirer stepped in (Bear Stearns).
Citi is now in those same cross-hairs. A deal to sell its Smith Barney stake to Morgan Stanley (NYSE: MS) is rumored (Update: Citi confirmed this morning it is in talks with Morgan), but it would only bring in $2.5 billion in cash. That's not enough to cover the $10 billion in anticipated losses Citi will suffer in the fourth quarter. The government has already granted Citi $45 billion in capital and $269 billion in toxic waste guarantees (it is on the hook for the first $37 billion in losses).
The risk on Citi's balance sheet is literally incalculable. It is only possible to imagine how much financial firepower is targeted at wiping out its slim capital. At the end of September, Citi had only $126 billion in shareholders' equity arrayed against enormous risks -- including $37 trillion in derivatives and $1.2 trillion in off balance sheet -- special purpose entities (remember Enron?).
But Citi's problems could also come from good old fashioned loan losses like the $1.4 billion hit it took for the bankruptcy of LyondellBasell -- a borrower that filed for bankruptcy last week. After all, Citi has $68 billion worth of home equity loans with poor documentation and $166 billion in foreign-consumer loans, which are outside U.S. government guarantees.
Something is going to happen this week with Citi, and I am afraid it will involve throwing more tax money after Citi's bad bets.
Update. As I posted last November, when a stock drops below $5, many institutional investors and pension funds have to sell it. So if Citi falls below $5, watch for major selling pressure.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
1-13-2009 @ 9:31AM
nick said...
This is the classic slime job on CITI by the wonderdog RUBIN. Another one of billy boys clowns who was built up by the liberal slime press over the years, I put him in the class of Madoff, but he was able to do his in a legal fashion,
1-13-2009 @ 11:10AM
WC Peterson said...
Let's see. Citi scored a $35 billion bailout from the taxpayers of this country, then ran out and bought an Italian transportation company for $11 billion the next week. And now, Citi may go bankrupt? How did we not see that one coming? Sooner or later, we'll wake up and realize that this old Reaganomics is nothing but a shell game to make rich republicans richer.
1-13-2009 @ 1:23PM
Larry Batek said...
Racism is wrong in any
culture. Citi bankrupt?
Why not let Obama pic
the Premiere of China to head the SEC. Their performance would be real red not purely in
the black. Stupid! LJB
1-13-2009 @ 2:34PM
Charley said...
Who Cares Let them go under,
1-13-2009 @ 3:06PM
roberto said...
lets see they raised my interest on my credit card, never ever been late. reason was well its like because we could. well i then paid off the credit card but for 5 dollars, switched from paperless statements, to paper just because i could and let them spend money on the statements and mailing cost! will use the card once a month to buy a candy bar to keep the card active. well gotta go and buy a plasma tv and will use my faithful low low interest card from navy federal. citi sucks go where the titianic is!
1-15-2009 @ 6:53PM
Bob said...
Dead skunk in the middle of the road.