Citi's Balance Sheet Is Just Too Big to Fix

Not that anyone has been listening to the small fry (see prior post “Put Citigroup out of its misery” June 26-08), and rightly so, but the recently released Global Finance Magazine rankings of the world’s safest banks is out, and the #1 choice says it all:

kfW in Germany took the honors, and they’ve been owned by the German government since inception in 1948. Now I’m not advocating a complete change in the private sector nature of finance and capital, but Citibank (C) is a unique case, and it’s balance sheet is just too big to fix.

The U.S. government might do it via the backdoor, with an increasing equity stake with each follow-on equity round. But as with AIG, they’ve proven they’ll do what it takes. Unless the U.S. government knows something about the health of Citi’s balance sheet that isn’t implied in the $1 share price, now is the time to step into the breech and nationalize Citibank.

When Goldman (GS) boss Blankfein spoke out against the concept (see prior post “Recession to be longest since WWII” March 9-09), is he also saying that “no one is too big to fail”? He didn’t go that far, as he has spoken in favor of government bailouts when there was no alternative. Does GS benefit if Citi continues to be Dead Bank Walking? Perhaps. But I don’t think that is driving his perspective; it’s likely just the classic “a free market is the only market worth living in” mentality.

But these aren’t times to live by a bumper sticker.

Why does saving Citibank a year from now make more sense than doing it today? The drip-drip-drip of the negative headlines and writedowns and so forth will continue to have a huge negative impact on the more healthy names, such as Wells Fargo (WFC) and JPMorgan (JPM).

It’s as though the powers that be will try leeches before resorting to the ultimate cure-all. Just get it over with. The slow motion train wreck won’t have a chance of ending until you do.

When the world returns to normal (at least a “new normal”), Citibank should be fixed and there might even be a willing IPO market. The U.S. Fed could be the new King of Private Equity at that point and just take Citi public again.

General Patton wouldn’t use incrementalism to win a battle, and this challenge certainly stacks up against the Battle of the Bulge. This time, however, it is the Germans who have the staying power, whether they be state-owned or publicly-held.

Disclosure - I own GS

Comments

[Mark Bern:]

Today would seem to be a poor time to bash Citi since information out of the government and Citi are so optimistic about the future.

There could some upside for a short-term play on Citi since the stock price has been beaten down so harshly. Those who like a good game of poker may be doing well today. Hopefully, they know when to fold 'em because this one seems just way to risky to hold for the long term.

I don't mind taking risks just as long as the risks can be identified and defined. In the case of Citi, though, there are just too many off balance sheet assets to be able to make the case. I mean, why are they off balance sheet in the first place? If the assets were of high quality, wouldn't Citi being moving them to the balance sheet to shore up credit ratings or improve external perceptions? These are the assets that they can't sell at a reasonable price to raise much-needed capital. I've seen reports that suggest these assets have a book value in excess of $ billion.

How impaired are these assets? Can the government really find investors who will purchase them are reasonable prices? What is reasonable, 60%, 50%, 30% or what the market was pricing toxic assets at aroung Thanksgiving, about 22%? Even if they get 70% (highly unlikely) that would mean a write-off upon the close of the sales north of $300 billion more for Citi. Can they really absorb that much of a reported loss and remain viable? Can we, the taxpayers, absorb that much of a loss from just one entity? Then, how do we deal with the others like AIG? How much will all this cost future generations?

Okay, I'm sorry. I'm not really suggesting that Citi will, in fact, have hundreds of billion in write offs. That is not the point. The point is: maybe they do, maybe they don't. The total lack of transparency means that nobody knows for sure. And I suspect that if the problem really was as small as they want us to believe it is, they'd have already told us the truth. Nobody hides the truth if it can't hurt them. Just what is the truth and why are they still hiding it?

With this much uncertainty, buying Citi does not seem like investing to me. It's gambling!

Go ahead, roll those dice and have a nice day.

Mar 10 11:56 AM

[Mad Hedge F...:]

C may have finally hit bottom. Looks like there is a massive short covering play setting up in the financial sector. There was big hedge fund buying of calls and call spreads in the Financials Select Sector SPDR ETF (XLF) at the end of last week. The healthy components of this basket, like JP Morgan (JPM) (12%), Goldman Sachs (GS) (7%), and Wells Fargo (WFC) (6%), are at record low valuations. The sick ones like Citigroup (C) and Bank of America (BAC) are essentially at zero. This makes your downside risk very low. Watch this space.

Mar 10 12:04 PM

[D Ramses:]

Umm, hmm. Nationalize Citi and risk alienating all of our financial allies? What don't you understand about the "too big to fail" moniker? It's a geo-political classification. Citi will never be fully nationalized and its onl because of public outcry and a more assured profit guarantee that the government is even putting itself into this bank. How else do you think we're goign to plug the gaping holes in the US balance sheet than to spin these investments off stealthily and without fully committing to the market's forces ergo AIG. This is AIG the remix with less risk but clearly as much to gain on a reversal and eventual profit.

Mar 10 01:35 PM

[Rohan C. Pease:]

I rolled the dice on BAC on Friday afternoon and I am selling into this strength today, so far I've been able to net a 51% gain. I bought @ 3.07 with a stop loss at 2.93. Use the volitility to your adjantage. I'm aware that BA's tangible book equity is ZERO when accounting for bad loans, however this market is irrational and short term volitility can be your friend if you hegde your positions properly. There are long term issues with these banks, however on a day like today, shorts please stop the rentless bank bashing/nationalizatio... However it's probably the whole talk of nationalization that allowed me to net 50%+ over a couple of days, thank you shorts.

Mar 10 01:48 PM

[Whitehawk:]

What happened today was massive short covering. I still wouldn't be long any of these names. Have the fundamentals really changed? No. They are simply speculative trades. Buy on weakness and sell into strength.

Mar 10 05:46 PM

[Andy G:]

In response to "Why does saving Citibank a year from now make more sense than doing it today? The drip-drip-drip of the negative headlines and writedowns and so forth will continue to have a huge negative impact on the more healthy names, such as Wells Fargo (WFC) and JPMorgan (JPM)."

First, the more time that Citi has to fix it's balance sheet problems, the more it will be priced based on it's long-term franchise value (probably decent) instead of it's liquidation value (probably insolvent). Second, the spill-over effects of asset sales from liquidating Citi would be hard on competitors like WFC & JPM -- probably worse than the current bad headlines. Third, no one in the government would have as much incentive to maximize value of Citi's current balance sheet as private holders and management -- liquidation would just socialize losses and prep the market for the next, newly-generated insolvency case.

All the programs (FDIC insured debt, TALF, TARP, relaxation of market-to-market accounting, etc.) are just excuses to to buy time. As individual traders, we learn that to take losses (i.e., "the first loss is the best loss"); but, that probably doesn't work at the macro level in a credit crunch of this magnitude.

Mar 10 06:38 PM

[bob zimway:]

Of course, Citi is a speculative play. The whole market is. But Citi holds a special distinction of being propped up in its trade to trade pps. Anyone following the ticker the last four days could see the safety net. Anyone thinking of shorting won't get too far. Today's action would have been a wild roller coaster without that crutch. It's a poker game with a good tell: the day it drops as much as five cents, there's your signal that the crutches are off. Have fun, comrades.

Mar 10 07:02 PM

[Moon Kil Woong:]

If Citibank is so strong why were they asking for more capital infusion and government guarantees a few months ago? Also, couldn't Pandit say what he just said 6 months ago except for the Smith Barney Convertibles expected to convert.

Their core business is profitable. It's all those damn pesky reserves for losses. Oh sorry, that's why they can say they have a lot of cash. They left out the fact that it's committed. Lies such cute little lies just like Lehman's before it went under. Is there some magic banking liar's book around. Maybe "Power" or "The Prince".

If Citibank was so solid why do they negotiate with all their creditors and have multitudes of closed door secretive cult like meetings with the Fed and Treasury? Why does the government insist TARP is just not enough if the worst of the worst US banks is sound and profitable. Why is their default insurance spreads through the roof? Why do they borrow more from the Fed than their stock is worth? And why are they keeping all their trillions in derivatives positions hidden and off the books? Whyhas the Fed backstopped and bought billions of assets from Citibank which keeps hemorrhaging liquidity.

Mr. Pandit, it's not your retail bank profitability that's in doubt. It's your cash flow, liquidity, and asset base. If you don't understand that you should be a CEO of a fast food store (a chain is too complicated) not a bank.

If you don't think Citibank won't be at the public till again think again.

I don't have any money in Citibank, own the shares, or short them. Or better said, I don't treat the stock market like a casino even though it seems to be emulating it pretty well.


Constructe now known as Moon Kil Woong

Mar 10 11:27 PM

[User 366653:]

I really enjoy all this talk about shutting down Citi and/or B of A. All so neat and tidy - just nationalize the bank, let the government run it for a while, and everything will work out. I just have a few questions, which never seem to get answered by "nationalization" proponents:

Do all the toxic loans just magically disappear? How does nationalization make the balance sheet stronger?

Where is the evidence that a government-managed institution would be any better than a privately run institution? Does the government have some mysterious expertise at running a bank?

Mar 11 01:07 AM