Co-written by Loraine Ell
We recently published a report entitled Citigroup: Too Big to Fail or Succeed. It turns out that nothing has changed. Now that we have news of the Smith Barney merger with Morgan Stanley (MS), more information is coming out about how bad it is. More importantly, we want to know if the preferred stock we have been trading, C-P, will be able to stay afloat. We will know more details today on the downsizing program.
Frankly, we don’t think a breakup would be that bad. As long as the firm can survive, the common stock price is irrelevant. We didn’t see a major run on the bank when Washington Mutual shares got killed. Did you notice people continued to hold a ton of money in IndyMac when it went down? Seriously, the IndyMac story was in the financial press for months and many depositors did nothing.
My point is that some analysts out there have concerns that if the common stock price sinks, there will be a run on the deposits and the company will go under. Remember that we are looking at the preferreds, so solvency is our main issue. The credit default swaps jumped to $410,000 to insure 10 million in Citigroup bonds for five years. Keep in mind that it was only last September that we saw the price to insure the same amount for GE bonds at $500,000.
Our point is we have no new news on Citibank other than it is still in limbo and the weaker of the banks that the government wants to save. We all saw the damage that Lehman Brothers (LEHMQ.PK) caused and our gut tells us that Citigroup will sell more assets, get smaller, and keep paying their bills. All with the assistance of the US welfare system called TARP, or whatever new program they come up with next week.
Disclosure: Author holds a long position in C-P
