The End of Citigroup

Citigroup (C) shares closed Monday at $5.60 apiece. Only twice in recent memory have they closed lower: on November 20 and 21. Back then, the parlous state of Citigroup's equity caused Treasury to implement an emergency bailout package. Today, the b-word isn't bailout, but rather breakup: the Marketwatch headline says that "Citi may be broken up, under government influence". As Roger Ehrenberg says,

We are now seeing the sequel to the original Citigroup drama, As the Stomach Turns.

We know that Rubin and Bischoff are toast; it's pretty clear that Pandit is toast, too. But Ehrenberg makes it clear that Citi itself is toast, or should be:

It needs to fail. Just not in the haphazard, destructive way that Lehman failed. It can be done much, much better.

Someone needs to take Citigroup out behind the barn and shoot it. Because if we don't, it just may kill us in the process.

The good news is that if Citi can stagger on for another week, we'll have a new administration in place which isn't as ideologically opposed to outright nationalization as the current lot. Citi could easily go the way of RBS, and there's no reason why it shouldn't.

But that's not the only option. The other bit of good news is that Citi's domestic retail bank is relatively small, by BofA/JPMC/Wells standards. A buyer could be found for it relatively easily; if no US bank wants to step up, there are always the Canadians, or maybe Santander (STD).

The Smith Barney wealth-management operation is already halfway out the door; the investment bank could be sold to its own managers, much like Neuberger Berman. The credit-card operations and Banamex could be IPOed; the Polish bank could go to any number of European banks looking to expand east of Germany.

I'm sure there would be feverish bidding for the hugely valuable Citigold brand globally; once Citi's Japanese operations were sold off, the rest of Citi's global presence could either be absorbed into the investment bank or quietly sold off or shut down. I'm sure there are other bits and pieces I'm forgetting about here, but the point is that on a sum-of-the-parts basis, Citi's actually got some pretty valuable assets; the problem is of course on the liability side of things.

So either the government outright nationalizes Citigroup and then sells it off, or else it provides debtor-in-possession financing within some kind of Chapter 11 proceeding.

Either way, the world would see the failure of a too-big-to-fail bank, and that would in turn be salutary for anybody still trying to make money from the moral hazard trade.

Of course, the trick is to do the break-up in a slow and orderly fashion, and in this environment it's not clear that that's really possible. But something much more than a management shake-up is clearly needed: The problems at Citigroup are much too big and pressing for any executive team to solve, especially since there's no sign the company has a coherent succession plan in place for Pandit's departure. I'd say p=0.3 right now that Barack Obama's first major act as POTUS will be the nationalization of Citigroup. Yikes.

Comments

[Ishortyou:]

God knows what it could happen but one thing is certain and that correction of their books need to be done. Their brokerage arm has a lot of toxic waste in their books that need to be put at the open to take a closer look, so this move not necesarily seems to be that bad as long as that branch takes the uncertainties with them.

Jan 13 09:01 AM

[besposito:]

What would happen to their derivatives book?

Jan 13 09:21 AM

[Smarty_Pants:]

Good thing we injected $45 Billion into Citi in November and pledged a $306 Billion gub'mint guarantee to back them up. It helped them survive almost two months.

That deafening sound you hear is the accelerating whir of the printing presses.

Who's next?

Jan 13 09:55 AM

[Moon Kil Woong:]

Citigroup is a constant eyesore. It is worse than bankrupt. It has so much toxic off balance sheet derivatives it could sink the entire US economy. Rather than worrying about succession I think everyone there is worrying about how much they can cover up so they don't end up in Prison Inc.

Thank goodness it will no longer be in Paulson's hands. He seems to rather funnel an infinite amount of money to them than see them go down. I wonder what accounting there has his fingers on it. Maybe some of those tasty CDS contracts they have. Or did Citibank use the TARP money they got to clean it all up yet. I bet Paulson would like to know.

As for break-up. Citibank is favored to keep shedding assets until there is only a giant brown egg left for taxpayers. And I assure you it isn't going to be chocolate.

Jan 13 10:07 AM

[investorinPA:]

Give credit (big time) to Meredith Whitney, the only analyst with the guts to tell it like it is with Citigroup

Jan 13 10:20 AM

[User 336454:]

Pandit of Citigroup should step down that would be the 1st thing to do.

Jan 13 11:04 AM

[Teutonic Kn...:]

On top of every commenter had said so far, C fell prey to a fast changing banking landscape on three fronts that renders its business model outdated -- 1) Technological advances; 2) Regulatory paradigm; and 3) Customer needs.

First, with the general depositor being increasingly equipped with PC, laptops, smart phones, and the accelerated availability of affordable high-speed internet, both wired and wireless, online and mobile banking explodes.

Second, on top of the first, the public becomes more informed and sophisticated in investing through web. They go online for the best deals in CD, money market funds, savings accounts, etc., and brokerage as well.

Third, adding fuel to the fire, recent banking regulations opened the doors for a myriad of companies to become banks, such as GMAC, American Express, and even AIG to name a few. Competitions for scarce deposits fiercely intensify.

The reader could deduce for himself/herself that the need for a one-stop one-size fits all shop had practically vanished.

Jan 13 01:02 PM

[broker23:]

What will happen with CItigroup s shares, if the state nationalized it?

Jan 13 04:31 PM

[EMS:]

My guess is goose egg...


On Jan 13 04:31 PM broker23 wrote:

> What will happen with CItigroup s shares, if the state nationalized
> it?

Jan 13 06:36 PM

[monday1929:]

You, the taxpayer will assume the losing end of it, of course.


On Jan 13 09:21 AM BunnyBen wrote:

> What would happen to their derivatives book?

Jan 14 08:49 AM

[goldis4ever:]

Actually, the consumer division of Citigroup was a money generator for the bank. It's the corporate division, with credit derivatives as its starring instrument, that burning citibank. Just a few years, some mid-level managers had warned that the bank was too exposed in credit derivatives and strongly advised reducing its exposure quickly. But derivatives was making too much money for the bank and ignored the warnings. What's more, they let go those very same managers who sounded those warnings. I guess there must be a certain measure of satisfaction from those employees who had finally proven they were right.

On Jan 13 01:02 PM Teutonic Knight wrote:

> On top of every commenter had said so far, C fell prey to a fast
> changing banking landscape on three fronts that renders its business
> model outdated -- 1) Technological advances; 2) Regulatory paradigm;
> and 3) Customer needs.
>
> First, with the general depositor being increasingly equipped with
> PC, laptops, smart phones, and the accelerated availability of affordable
> high-speed internet, both wired and wireless, online and mobile banking
> explodes.
>
> Second, on top of the first, the public becomes more informed and
> sophisticated in investing through web. They go online for the best
> deals in CD, money market funds, savings accounts, etc., and brokerage
> as well.
>
> Third, adding fuel to the fire, recent banking regulations opened
> the doors for a myriad of companies to become banks, such as GMAC,
> American Express, and even AIG to name a few. Competitions for scarce
> deposits fiercely intensify.
>
> The reader could deduce for himself/herself that the need for a one-stop
> one-size fits all shop had practically vanished.

Jan 14 10:16 AM

[ROLEX18K:]

The end of Citigroup?
The one who said it must be drinking as it is the most contrarian comment made at the worst time.
If it would be said when C was 50$ it would be a wisdom, but to say it now is a stupidity.
I love C at 4.50$, I don't buy it as I don't trade stocks and I don't say the bottom is here, probably not at all and we may see reverse stock split soon, but to call it THE END of Citi....

Jan 14 02:14 PM

[User 265729:]

Don't you mean...

End of the world?

Jan 14 03:35 PM

[zalo:]

I think that saying that the business model is causing citi to implode is incorrect. Why? Because banks (Countrywide, Wahington Mutual), brokers (Bear Stearns, Lehman), wealth managers (UBS, etc) have very different approachs, technologies, philosophies and leaderships and they are also under. So, Citi is not suffering because of its business model, its suffering due to the financial crisis. Some weeks ago, when Morgan Stanley was in the edge, some were speaking that actually the supermarket approach provided stability to banks and that is why MS and Goldman turned to bank holding companies.
One thing is to have a business model that can keep the stock from outperforming and another is saying that it is the cause of an implotion. There is a huge difference in both analysis.

Jan 14 08:33 PM

[AHJ:]

Why don't we killl 2 birds with one stoen and "give" Citi to IRAN. Then we wouldn't have to go to war with them and we could destroy that country and their nuke program within 2 weeks without loss of a single American life and cut the US 2009 deficit by 40%


On Jan 13 09:01 AM Ishortyou wrote:

> God knows what it could happen but one thing is certain and that
> correction of their books need to be done. Their brokerage arm has
> a lot of toxic waste in their books that need to be put at the open
> to take a closer look, so this move not necesarily seems to be that
> bad as long as that branch takes the uncertainties with them.

Jan 15 12:26 AM

[phubaiguy:]

The party may be over for the speculators but I've watched them three times now hit C at stops during it's fall. 50,000 to 70,000 shares at my guess $5 a share profit for holding it a couple days. They did it with Wa Mu, HIG, AIG, MBI, ABK, etc. Stands to reason they would want things to be messed up. We're paying for their fun either by losing money on stocks or the fall of the dollar. Oh well C needs to do something to get everyone off it's back. BTW in case you have not noticed...another bank will just have to assume it's position. No more than I have left in C, I'll get my money back if it ends up being the bank of Paducah.

Jan 15 01:17 AM