Only a crazy person would invest in Citi

Posted Jan 13th 2009 6:40PM by Michael Shulman
Filed under: Deals, Bad News, Citigroup Inc. (C), Morgan Stanley (MS), Stocks to Sell, Financial Crisis

Yesterday, someone said to me, "Wow, look at Citi! Is it time to buy?"

I believe the same question was asked about the last big buggy whip manufacturer. And Citigroup (NYSE: C) is in much worse shape than the last of the buggy whip manufacturers.

But the Fed and the Treasury just bailed them out in November, right?

Yup, but all they did was to provide a bucket to bail out a sinking ship -- the leaks and holes are still there.

Hole No. 1: Besides the dodgy assets on its balance sheet, Citigroup has $1.2 trillion in off-balance sheet assets that may or may not be dodgy.

In a company town hall meeting in November, Citi tried to reassure everyone by telling them not to worry about more than $800 billion of these assets because "per accounting rule changes" they will likely not exist in the future.

Makes me feel good. How 'bout you?

To me this says it will need to raise more capital.

Hole No. 2: Speaking of Citi's balance sheet, one analyst took a very hard look at all of its "assets" and saw that it counts an awful large amount of deferred tax liabilities -- i.e., taxes it does not have to pay in the future, and the same thing Freddie Mac and Fannie Mae used to boost their core capital. He concluded that their leverage is off the chart.

What's leverage? The amount of assets/debts you hold compared to the core capital or equity you hold.

His calculation was 280 to 1. That might be a bit high, so let's cut it by 10 to 1 and say their leverage is 28 to 1. It should be 10 or 12 to 1. Oops!

This means it will need more capital.

Hole No. 3: More than $2.4 trillion, worldwide, in debt was downgraded in Q4 and some of this is probably held by Citigroup, which means it will need to raise more capital to maintain some integrity in their balance sheet.

OK, you get it -- Citi needs to raise more capital. So where is it going to get it?

No one is investing in any banks right now -- except for you and me through the Treasury.

All right, but Citi has to make some money going forward, right?

Nope.

According to analysts, the bank will probably have a whopper of a loss in calendar Q4 2008, not just due to write-offs of bad assets, but operating losses or weak operating profits at best.

And with financial markets and the economy the way they are, this weakness will accelerate.

Brokers are leaving, and Smith Barney, Citi's wealth management group and the crown jewel of the business, is losing accounts.

The company is contemplating putting Smith Barney into a joint venture with Morgan Stanley (NYSE: MS) at a very small price -- not just to generate any cash it can, but because it needs to stabilize the business.

The bottom line is that it really, truly needs more capital, and only the taxpayers can give it.

And for Citi getting it, well, I believe shareholders are either going to get a buzz cut or be wiped out.

The bank will eventually be broken up into various pieces -- the proposed sale of Smith Barney shows management is willing to do this -- and it will become a bank again rather than a conglomerate too unwieldy to manage.

Stay far, far away from Citigroup. Some things that look cheap should be cheaper.

Michael Shulman is a contributor to OptionsZone.com.

Tags: c, citigroup, financial stocks, financials, FinancialStocks, michael shulman, MichaelShulman, ms, smith electric vehicles, SmithElectricVehicles

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Reader Comments (Page 1 of 1)

1-13-2009 @ 7:51PM

Bobby said...

Shulman,

you sound like you've had a bad experience with Citi.

Citi might be the most well positioned out of all the troubled banks at the moment. There's no question short term Citi's in for the fight of their life. With that said, their short term toxic paper is being guaranteed & shored up by the US gov't. I think it's safe to say at this point none of the troubled banks have a true handle on the scope of their upcoming losses. That gov't guarantee will get them through this difficult period. That was the purpose of TARP.

Let me flip it around on you. What if Citi's losses (which are undetermined) are far less than what everyone is supposing? Basically,, your side of the argument is conjecture more than factual. The size of the asset sheet will allow Citi to survive this incredible downturn. They can sell units at steep discounts buying time as well as raising cash. The Stanley merger will save them a half billion alone in annual costs.

If what you say is true about Citi's finances, your guy must know something all other fund managers don't. True, they're a troubled outfit at the moment, but if they were as bad off as you say,, their stock price should parallel AIG's....

1-13-2009 @ 11:29PM

Tim said...

Bobby you sound like a Citi Shareholder. the story is assets v. Liabilities. The balance is tipped over to the liability side my more than 200 billion assuming that the off balance sheet assets are valued at 80 cents on the dollar. I'll give you one guess where the first 32 billion will come from... Citi common stock.

1-14-2009 @ 9:23AM

williambanzai7 said...

CITIGROUP BITES THE DUST
(Another One Bites the Dust, Queen)
WilliamBanzai7

Reed, Rubin, Pandit, Weil and Prince walk warily down the street,
With their brims pulled way down low
Ain't no sound but the sound of their slippery conniving feet,
Fed machine guns ready to go
Are you ready, Are you ready for this
Are you hanging on the edge of your seat
Out of the doorway the bust up bullets rip
To the sound of the bailout beat
Chorus

Citigroup bites the dust
Citigroup bites the dust
Another universal bank gone, and another one gone
Citigroup bites the dust
Hey, their gonna get you too
Citigroup bites the dust

How do you think we're going to get along,
Without you, when you're gone
You took us for everything that we had,
And kicked Uncle Sam in the financial groin

Are you happy, are you satisfied
How long can you stand the market heat
Out of the doorway the bust up bullets rip
To the sound of the bailout beat
Chorus

Citigroup bites the dust
Citigroup bites the dust
Citigroup bites the dust
Citigroup bites the dust
There are plenty of ways you can screw a man
And bring his net worth to the ground
You can cheat him
You can fleece him
You can feed him toxic financial garbage and leave him
When its time to mark em down
But we're ready, yes we're ready for you
We're standing on our own two feet
Out of the doorway the bust up bullets rip
Repeating the sound of the bailout beat

1-14-2009 @ 12:47AM

BHarrison said...

Fraud is Fraud, is FRAUD . . . right?

Well, "creative accounting", "$1.2 trillion in off-balance sheet assets", "derivatives", etc. all amounts to simple basic FRAUD in knowingly, and intentionally misstating the information on corporate balance sheets and other financial reports.

It is unequivocal that the use of such "unsound business and accounting practices is FULLY the root cause of our national financial melt down of our economy.

The BLATANT absurdity (and cirminality) of it all is too staggering to conceive . .. or to tolerate. There are a lot of CEOs, and CFOs who shold be being indicted for FRAUD. This is all somewhat equivalent to the fable about the "King's clothes" . . . educated and intelligent people committing FRAUD, by any other name, is still CRIMINAL FRAUD.

The economic results speaks for itself . . . it is what it is; and too many want to overlook the truth and reality of it all. "Denial" will not be constructive.