Citigroup Inc. (NYSE: C) is unmanageable. That's my conclusion after trying to understand its latest quarterly report. The concept behind this 100-armed corporate octopus is that people like to buy all their financial services in one place and therefore it makes sense to be able to sell them a full line of products from stocks to bank accounts. But I suspect that customers don't want all their financial eggs in one basket, so the concept is fatally flawed.

Moreover, its financial performance reveals that Citi is a complex mess whose many different businesses do not diversify its earnings streams. According to its quarterly report, Citi lost $5.1 billion. Most of the losses came from its Securities and Banking (-$6.4 billion), Alternative Investments (-$509 million), and U.S. Consumer (-$476 million) units. Two bright spots were $1.3 billion in earnings from International Consumer and $732 million in Transaction Services.

But wait, there's more in its huge, risky portfolio. Citi has $40 trillion in derivatives -- enormous bets on interest rates and currencies. And it has $1.2 trillion worth of off-balance sheet entities (remember Enron?). Nobody really knows what these are worth or how much they'll cost. And that doesn't even get us to the $262 billion in Level 3 assets -- illiquid, difficult-to-value securities -- which are 2.1 times Citi's $128 billion in capital. That's a pretty thin cushion for future write-downs.

Reuters reports that Citigroup (NYSE: C) is poised to announce today the sale of $400 billion worth of assets -- that's 18% of the total. We'll need to wait to find out which assets it plans to sell and how much of a loss (or profit) Citi will take when it sells them. But the New York Times reports the company's deciding based on industry growth trends, market positions, geographic growth rates, business plans and financial results.

I worked for a global bank during a credit contraction and part of my job was to figure out which assets to sell. From that experience, I know that Citi's challenge is to find assets that don't fit with Citi but are worth more to another owner. That's because often the assets that make the most sense to sell strategically are the ones that nobody else wants to own. And the ones that make the most sense to keep are the ones that could generate the biggest profit, if sold. Citi's challenge is to sell the $400 billion worth of assets that make strategic sense to sell and will fetch an attractive price. In today's market, that is a challenge.

So what Citi assets could be on the block? Reuters notes that Citi's U.S. student loan business may make sense to sell, after recent legislative changes and turmoil in the securitization market have made it less profitable. Citi may sell Primerica, a consumer sales network for life insurance and investments. And Citi should sell assets on its trading books, which have contributed to much of the $45 billion write-downs that Citi has taken so far.

UBS (NYSE:UBS) is making a bid to increase the unemployment rate all on its own. The bank will lay-off 5,500 people, mostly investment bankers. It will also sell a package of $15 billion portfolio of subprime mortgages to Blackrock (NYSE:BLK). According to Reuters,"UBS cautioned that conditions in financial markets were still tough and declined to offer any results forecast."

The UBS comments about what happens next are a coded message that layoffs at the firm may not be over. UBS has suffered as much or more from subprime write-downs as any bank in the US or abroad.

The news is especially bad for people employed at brokerages and big banks. A continuing spike in mortgage defaults could cause more difficulty in the pool of financial instruments created around the market. That, in turn, could cause more write-offs at large banks triggering the need to raise capital and cut costs.

Tens of thousands of people have been fired on Wall Street already. The news out of UBS shows that the process is far from over.

Douglas A. McIntyre is an editor at 247wallst.com.

Focus LLC, investment banking service provider, has announced the acquisition of U.K. based Avialec by Kapco-Valtec, in a move aimed in part at expanding Kapco-Vatec's marketing base. Avialec, based in Petersfield, England, is a provider of electrical components to the aerospace industry. Building on eight years of growth, Avialec company leadership sought the benefit of increased aerospace industry clout which Kapco-Valtec presents.

Barrie Prescott, CEO of Avialec stated in the Focus LLC press release, "I had decided it was time to put Avialec under the wing of a larger progressive organization with financial firepower to realize the many opportunities before us ... FOCUS was the perfect firm to help us realize our goals."

Kapco-Valtec, a leader in aerospace supply chain management, shall provide market leverage for Avialec to realize it's expected growth potential, while gaining the benefit of greater exposure to Avialec's major accounts in the U.K. Likewise, Kapco-Valtec shall provide broader exposure of Avialec to U.S. aerospace accounts.

The Focus LLC investment bankers press release stated: "As is the case with the growing number of international M&A transactions, this deal is a win-win for both companies. We were pleased to be able to complete the transaction in just over four months, said Manan Shah, a FOCUS Partner."

For further information regarding this acquisition and the services of Focus LLC, please visit the Focus website at www.focusbankers.com.

There's nothing quite like the earnings game on Wall Street. And two big banks -- JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) both played it very well. Despite falling earnings, investors are celebrating. And that's because JPMorgan and Wells both beat analysts' expectations.

Bloomberg News reports that Wells earned 11% less than last year -- $2 billion, or 60 cents per share -- 5.3% more than the 57 cents that analysts had expected. Wells took in $334 million from its stake in Visa Inc. (NYSE: V) IPO, but it also benefited from a tight credit culture and an aggressive sales force. Nevertheless, its charge-offs for bad credit card and automobile loans were up 26% -- a sign of trouble in consumer loan land.

Meanwhile, AP reports that JPMorgan beat analysts' expectations by 6.3% despite a 50% decline in its net income. Specifically, JPMorgan profit fell in the first quarter to $2.37 billion after it took a provision of $5.1 billion to strengthen its reserves by $2.5 billion and account for $2.6 billion in losses in its loan portfolio. JPMorgan made 68 cents per share compared with $4.79 billion, or $1.34 per share, a year earlier. That was 4 cents more than the 64 cents that analysts expected.

Too often Wall Street snaps that the federal government should leave it alone. Then, once things go wrong, these fiscal conservatives transform themselves into New Deal Democrats and applaud moves like the Bear Stearns Cos. (NYSE: BSC) bailout.

Now comes word from Washington that the investment banks better prepare themselves for greater government scrutiny. The question is how much. These dealmakers are now crying that they want the government's help without any additional oversight. That seems like a non-starter and even the Bush administration recognizes the need for greater oversight of Wall Street.

Speaking in Washington today, Treasury Secretary Henry Paulson said Wall Street firms will need to provide additional information about their financial conditions if they want to borrow money from the Federal Reserve. The former Goldman Sachs Group Inc. (NYSE: GS) CEO stopped short of calling for investment banks to face the same regulations as commercial banks.

"Mr. Paulson acknowledged that the Fed's decision to lend to investment banks creates a contradiction between how commercial and investment banks are being treated, and he implied that investment banks ought to be subject to the 'same type of regulation,'" The New York Times said. "But moments later, he said: 'Recent market conditions are an exception from the norm. At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil.'"

Looks like the adage of a conservative being a liberal who got mugged needs to be revised.

Some Wall Street analysts believe that most write-offs for subprime mortgages, LBO loans, and other credit paper are behind the big banks and brokerages. Goldman Sachs (NYSE:GS) analysts think otherwise.

According to Bloomberg: "Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed."

If the analysis is true, it will cause two huge problems in the financial markets. The first is that banks and brokerages will probably have to raise more money. This capital may be hard to come by. Sovereign funds and private equity firms appear to have lost their appetites for investing in US financial companies while their stocks keep dropping. That leaves the Fed to provide more capital, which will have to come from someplace. That someplace is the tax base especially individual taxpayers.

The other byproduct of more losses is that banks will cut lending to customers even further instead of risking capital on consumer credit, auto loans, mortgages, and small business loans.

In other words, borrowing a dollar for a cup of coffee may be out of the question.

Douglas A. McIntyre is an editor at 247wallst.com.

It has happened before. The cuts were especially deep after the market crash in 1987. New York City now believes that Wall St. will cut 20,000 jobs over the next two years. The number seems too small.

Accoding to Reuters: "The city's Independent Budget Office, in its report, estimated that Wall Street's profits for 2007 will sink by more than 80 percent to the lowest level since 1994." Financial firms account for almost 35% of all income in NYC.

While this would seem to be a local problem, that is not entirely true. Companies that sell luxury items from Tiffany (NYSE:TIF) to BMW will take some hit from falling employment among workers at big banks and brokerages.

Just as important, all of these people pay a hefty federal income tax. As unemployment grows the government will see receipts from the IRS fall. The more of the rich who move off the payrolls, the more difficult it will be to cut the Federal deficit and fund agencies like the Fed.

Douglas A. McIntyre is an editor at 247wallst.com.

Since coming on board, the CEO of Citigroup (NYSE: C), Vikram Pandit, has been using his cost-cutting knife. For example, he cut about 4,200 jobs in January.

And this week, we are seeing more – that is, 2,000 job cuts. The highest concentration will be in the investment banking and trading departments. In fact, it looks like some senior-level folks will get the axe.

Basically, Citigroup needs to take action to right-size its operations to the current environment (after all, in the prior quarter, the company sustained a $10 billion loss). It certainly looks like we'll continue to see tough time for buyouts as well as public offerings. And of course, don't expect much in the mortgage finance category.

Unfortunately, it looks like Citigroup may take further cuts throughout the year (especially if the markets remain in the doldrums). So unless you are a stellar "master of the universe," you just might get a pink slip.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Some fairly simple math indicates that it wouldn't take much to wipe out the capital of the banks and hedge funds. And this simple math helps explain why the popular delusion that 'liquidity' = 'capital' is so dangerous. That mental equation works just as easily to create the illusion of prosperity as it does to eliminate the capital that is supposed to stand as bulwark against bad lending decisions.

That's because investment banks and hedge funds combined have borrowed $10.9 trillion on a sushi-thin slice of equity of $340 billion. Newsweek reports that on average, the ratio of borrowed money to underlying capital for investment banks and hedge funds is about 32-1. It reports that in 2006, investment banks had an estimated $280 billion in capital. At 32-1, the investment banks are borrowing $8.96 trillion. Meanwhile, hedge funds manage $1.9 trillion worth of assets – which would represent $60 billion in equity and $1.94 trillion worth of debt.

What would it take to gobble up that little piece of sushi? Well, collateralized debt obligations (CDO) represented a $6.1 trillion market. I say 'were' because I am guessing that this figure refers to the value of the CDOs when they were issued. And CDOs seem to be worth some amount below that now. I have seen estimates that they are worth 20 cents to 40 cents on the dollar of their original value.

But if investment banks and hedge funds had used all their money to buy these CDOs, then it would take a mere 6% decline in their value to wipe out that $340 billion in capital. Obviously investment banks and hedge funds have invested in other things besides CDOs. But when you borrow $32 for every dollar in capital, there's not much room for error.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

MAJOR PAPERS:

• According to people familiar with the matter, the Wall Street Journal reported that an investor group that includes Harbinger Capital Partners is expected to report a raised stake in The New York Times Company (NYSE: NYT). The raised stake is expected to be close to matching the 19% stake owned by the Sulzberger family.
• The Goldman Sachs Group Inc (NYSE: GS) has been spared many of the problems of the subprime mortgage crisis, but other areas where it's involved, such as investment banking and leveraged loans, are hurting the firms profitability, the Wall Street Journal reported.

OTHER PAPERS:

• Cablevision Systems Corporation (NYSE: CVC) is seeking to put a valuation on its Rainbow Media unit, in order to possibly sell it, sources say. In the past, the unit, which consists of several cable channels, has been valued at $3B, but the Dolan family is hoping to obtain a higher price, according to the New York Post. Possible buyers include Liberty Media Corporation (NASDAQ: LCAPA) and News Corporation (NYSE: NWS).
• Elan Corporation (NYSE: ELN) is considering splitting its biopharmaceuticals arm, which markets Tysabri, from its drug technology division, the Sunday Times noted. The potential spin-off could unlock up to $1.5B to share holders.

The stock price of Blackstone (NYSE: BX) continues to languish, close to an all-time low. No doubt, Wall Street knows that the private equity game has gone into a deep freeze.

Yet Blackstone has been around since the 1980s and certainly understands how to deal with market cycles. Right now, the firm is looking at distressed investing opportunities as well as deals in emerging markets.

And there's something else, though it hasn't gotten much buzz: Blackstone is getting traction with its investment banking division, according to a piece in FinancialNews.com.

In fact, Blackstone is a financial advisor for Microsoft (NASDAQ: MSFT) on its $44.6 billion buyout offer for Yahoo! (NASDAQ: YHOO). This is definitely a marquee assignment – and could be a nice fee generator. Blackstone is also an advisor to Reuters in its merger with Thomson.

Readers of this space know that the investment thesis offered here favors large-cap companies with demonstrated business models that have a competitive advantage in established markets, preferably with a favorable global trend as a support.
Still, every once in awhile an exception is made, in this case to get-ahead-of the-curve regarding a sector's recovery, and with the aforementioned in mind, JP Morgan Chase is worth an evaluation.

JPMorgan Chase (NYSE: JPM) is the third largest financial services firm in the United States.

Analysts like JPMorgan's solid organic growth prospects, diverse product lines and wide geographic footprint. JPM has more than 3,000 retail bank branches.

Equally significant, analysts believe JPMorgan's subprime related asset exposure is manageable: it's in a much better position than its peers. Furthermore, analysts expect strong growth in asset management fees and in treasury/securities services to offset slumps in investment banking and credit quality. The Reuters F2007/F2008 EPS consensus estimates for the company are $4.18/$4.58.

Three key numbers for Citigroup (NYSE: C) this morning: $24 billion, 20,000, $10 billion.

According to a report on CNBC, the enormous bank is poised to writedown another $24 billion related to bad mortgages, and could lay off 20,000 workers. In addition, the bank may suspend or cut its dividend in an effort to conserve $10 billion per year in cash.

It remains to be seen how the market will react. Obviously, more writedowns and layoffs are bad news but, as I wrote on Friday, cutting the dividend as an alternative to raising money from foreign investors makes sense in light of the depressed share price.

But that doesn't mean investors will like it. Receiving cash distributions can feel reassuring in light of daily headlines about how tough the market is. But it's the right thing for the company to do long-term, and hopefully Citigroup will do it.

Research firm Punk, Ziegel & Co is putting a "buy" rating on Citigroup (NYSE: C). The research firm feels that the bank is the best proxy for investing in the global investment industry and that its write-downs are secondary. Quoted by MarketWatch, the firm said "The stock allows one to invest in the world's financial growth better than any other company. Others perform in one part of the financial sector or operate in one portion of the world."

That comment may be akin to saying that if you are going to drown in quicksand, you might as well find the best quicksand available. Citigroup is hardly a strong investment and the fact that its business operations are global and that it operates in many sectors has nothing to do with whether the bank can do well over the next year.

Citigroup is being scuttled by huge write-offs in its mortgage-related investment portfolio. Earnings from other divisions in the company are not likely to offset this and the bank may have to raise more capital. The resulting dilution could certainly drive the price of the company's stock down. There have also been comments from Wall Street that the big bank may have to cut its dividend. That is likely to make it much less attractive to a certain category of "yield-minded" investor.

Citi shares could be hit by more write-offs and the need to bring in a large sum of new capital.

That hardly makes it a "buy."

Douglas A. McIntyre is an editor at 247wallst.com.