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