Citigroup on the Brink, Despite Government Rescue

The term that is the basis of all discussions in elementary economic modeling, especially when comparing two factors, is ceteris paribus. Ceteris paribus means "with other things the same" and represents the best guess as to what is likely to occur provided all thing remain unchanged. Let us take an overly simplistic view of the situation with Citigroup's (C) government rescue plan and determine the potential outcome ceteris paribus.

According to the Wall Street Journal, in an article by David Enrich, the federal government has agreed to absorb $277 billion of $306 billion of losses that Citigroup has identified as "troubled" assets. Additionally, the Treasury is adding $20 billion on top of the $25 billion recently injected into Citigroup as part of the TARP plan. Remember, the $277 billion is separate from the $700 billion bailout package. Again, this current approach with Citi is counter to the early arguments that there needs to be a comprehensive solution, not an individual approach, to the bailouts after the fall of Fannie (FNM), Freddie (FRE), Lehman, Merrill (MER) and WaMu, which spawned the TARP plan to begin with.

Now, let's look at only the off-balance sheet portion of Citigroup. The off-balance sheet portion is called an asset by Citi but isn't included on the books. The off-balance sheet items are valued at $1.23 trillion. I don't know why Citi wouldn't include these items on its balance sheet, but if the U.S. government is any indication, then the off-balance sheet is probably more like liabilities instead of assets.

If the government is going to front Citi $277 billion (a whopping 40% of the total TARP package for only one company), then that would leave $953 billion remaining on the off-balance sheet portfolio. If we split the $953 billion in half and conservatively assume this portion is "troubled," then we have a figure equal to $476.5 billion. Remember when Merrill Lynch auctioned off $30 billion of CDOs or "troubled" assets back in July 2008? Here's what Bloomberg.com said of that auction on July 29, 2008:

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

At the time, Merrill was only able to get $6.7 billion, a loss of 78% or $0.22 cents from every dollar originally invested. Therefore, my assumption of a 50% loss for Citi isn't so far fetched.

Ceteris paribus, this leaves Citi with at least $476.5 billion in losses to write down at some point in the future. This assumes that the economy remains in a slight recession, that earnings are the same, that the dividend for this company has been all but eliminated, that there are no further losses in the housing market. All things being equal, Citi is in for hard times. However, if we take 78% of the entire $953 billion, then we get a total loss of $743 billion, a sum exceeding the amount of the entire TARP program even after a $277 billion direct injection to Citi from the government.

Clearly our government under Bush/Obama has severely underestimated the extent of how much damage has been done to our financial system. Along with the lack of knowledge that has been demonstrated, the only policy reaction is to have a blank check approach to dealing with the problem. This is what I meant when I said that chaos will ensue when and if Bank of America (BAC) falls below $14.00.

As I write this at 12:15pm Monday, Fox Business News host Liz Clayman just said that she went to her Citigroup ATM twice last weekend and the machines said that no money was available to customers. Clayman later joked that if Citi is really in good shape after this bailout then it needs to refill its ATMs. Wow!

Sources:

• Enrich, David. "U.S. Agrees To Rescue Struggling Citigroup." Wall Street Journal. November 24, 2008. viewed online November 24, 2008.
• Keoun, Bradley. "Merrill Sells $8.55 Billion of Stock, Unloads CDOs." Bloomberg.com. July 29, 2008. viewed online November 24, 2008.

Comments

[investor88:]

Agree Citi is on the brink even after bailout

2008 Nov 25 08:47 AM

[ronhall:]

typical non intelligent babble.The man obviously hates his job

2008 Nov 25 09:20 AM

[Alecto:]

This is pathetic journalism.

"If we split the $953 billion in half and conservatively assume this portion is "troubled"...."

Can you give any qualification for how that ridiculous assumption is conservative? Or how you can assume that the assets that Merrill sold are in any way similar to the assets held in Citi's OBS vehicles?

The whole point about the world of structured assets and the problems with valuing them is that they are all unique and illiquid.

Can anyone explain why the banks aren't all forced to open their books to public scrutiny so that the market can assess the state of their assets for itself rather than relying on accountants and traders to perform highly subjective valuations behind closed doors?

2008 Nov 25 10:41 AM

[sumosama:]

A monkey throwing darts...make that a drunken monkey...would have a higher likelihood of being on the money than this author. Research?

2008 Nov 26 02:21 PM

[InnocentsAb...:]

Uhh. I think the drunken monkey is the American moneyed class, which, in a short period of 8 years, has managed to have its nominee decision maker destroy not only our economy, but approaching destruction of the economy of our trading partners.

Just because the US government is attempting to cover up the levels of disaster wrought by Bush's money center friends, doesn't mean the abyss is not there. None of the money center institutions are revealing the actual nature of their off balance sheet assets.

It seems only reasonable to make an estimate. That our estimates are off, is not an indication of a poor estimation problem, but the depth of the hidden corruption our country faces in form of the economic remnants of the Bush years.

2008 Nov 30 11:27 PM