Why I'm Holding On to Citigroup Stock

Citigroup (C) has quickly become one of the most rotten, stench-producing equities on the market. From taxpayer infuriating bailouts, to non-existent dividends, to Citi’s desperate attempts at asset rebuilding vis-à-vis self-amputation (think Nikko Cordial), all the way down to the suspicious “leaked” memo concerning its operating profit expectations, it is in a sorry state. At the moment, however, I am determined to remain long on this sick puppy. Fundamental to my thinking is the fact the U.S. government now has a near 40% stake in the bank, and nationalization—at least the de facto kind that leads to shareholder wipeout—is off the table. Forget the “too-big-to-fail” rhetoric.

Regardless of the truth of this, the government has put its money [my taxes] where its mouth is and purchased about 36% of the company’s common stock. Hold onto this for a moment. Consider Citi’s recent repurchasing of mounds of the evil mortgage-backed securities which got it where it is in the first place. Why would Citigroup (and Bank of America (BAC)) disregard its Treasury-sanctioned obligation to lend out the bailout money it received, thus priming the loaning mechanism of our economy like we were told? Why would it take that money and buy more of those bad debt obligations? That is very strange behavior, at least at a cursory look.

Within the context of the the huge government investment and the banks’ recent meeting with President Barack Obama, CEO Vikram Pandit’s seemingly disingenuous anticipation of profitability and the ostensibly misappropriated use of the bailout money make it appear that Vikram Pandit wishes to annoy the new administration and risk an SEC, Senate, or other legal investigations. Obviously, Pandit is no Sandy Weil. But he is not an idiot. He is merely doing exactly what the government has instructed him to take the lead in doing—transforming his own bank into the proverbial “bad bank.” However, Citi—along with BofA, most likely—will not simply hold these bad assets in suspended financial animation. They will sell them back to the United States government (and the speculative investor) at a premium.

What will happen then? Well, if the FASB changes the mark-to-market rule, they will be inflated in value before even being sold on the secondary market. Of course, once they are sold through the Timmy’s PPIP, the buying pressure will bring the price up even more. Of course, the government or investor is being ravaged without mercy, since they are paying inflated prices for the MBS. In the case of the government, however, their 40% stake in Citi will become much more valuable once Citi’s own assets shoot through the roof (although they are paradoxically buying the assets which are inflating the price). So what this comes down to (and I optimistically believe the latter) is gauging what represents the bigger amount: the cost of the government buying the MBS, or the increased value of the government’s partial ownership of Citi.

Now, considering all of these things - the memo, Citi's quarterly report on April 17th, its recent acquisition of more mortgage-backed securities, the "Uptick Rule" change that would limit short-selling, and the asset inflating mark-to-market reform - I believe there is a deliberate dynamic at work here to send Citi through the roof. I do not believe most of these to be disparate occurrences.

There are no surprises here for the government. With Citigroup being the beneficiary of government aid that it is (in multiple forms), the government is not allowing Citi to “fly solo” and speculatively squander the loan money. Publicly, Citi is not nationalized, and still has control of its own actions and interests. Privately, however, they are being accountable to a government which is threatening to bust its knee-caps. The two are working with one another, albeit behind closed doors, each acting as a special entity for the other, ultimately to benefit the shareholder, individual or government.

Disclosure: Author owns Citi stock

Comments

[User 336258:]

I agree with the author. This strock will not go body-up. It's here to stay at a near term price of 5.75 in (4-6) months. Buy this stock.

Mar 31 05:49 AM

[Zyx007:]

Hope springs eternal in the human heart - William Shakespeare
Fools and their money are soon parted - Anonymous

Mar 31 05:57 AM

[jerrybruce:]

I have a few shares of citi so we will see if the comment above is correct. I will gamble a little on this one BUT cautiously!!! Foreign money is still involved here so be ever watchful...

Mar 31 07:36 AM

[User 365213:]

As an ex-employee I have more than my fair share of Citi and at this point I might as well hang on. It will be a long time though before Citi sees anything near 5.75. The company lost its way on risk management when Sandy and his cowboys came in. Sandy paid a lot of lip service to the notion, even making risk "independent", but risk never had a say in the US and UK. Investment bankers and traders ruled the roost and risk was a voluntary or involuntary (at times) stamp of approval. In emerging markets, where the old Citicorp culture was still alive, things were different.

Add to current woes the wave of commercial real estate and corporate defaults still to hit, and the growth in unemployment (ie more delinquent mortgages, car loans and credit card receivables) and one has to think that Citi may still be in need of substantial capital injection by its biggest shareholder.

Not sure Citi knows what its doing and clearly the government is clueless on these issues. So chances of Citi "hauling --s"? Zip to nil.

Mar 31 08:39 AM

[brotherrandor:]

I am hugely long on Citi and I sleep well... most of the time. I feel relatively safe and cosy being in bed with Uncle Sam. I am hopeful that the fat gains derived from the present crazy yield spread will eventually outweigh Citi's foolish meltdown losses and normal course recession loan losses. Idiotic accountants will soon no longer be able to impose market-to-market valuations when there is no market. And, most of all, I believe that share prices always overshoot; in this case the herd of wildebeests has stampeded way down into the desert and is about to return to the verdant $10 hillside.

Mar 31 08:44 AM

[Jonathan Ch...:]

The current Citi stock should be considered a Call Option with no expiration date. The potential down side is $2.65/ share. The potential upside is around $40 a share. No-one can predict the future of this stock, There are too many unknowns and uncertainties.

I have a small stake in this stock.

Mar 31 08:50 AM

[ifuwish2:]

i think that when the mark to market and uptick rule comes the stock will soar,,anyone can see that,,so why not buy some and get some of the money

Mar 31 08:51 AM

[Alex Trias:]

A very interesting analysis of a very complex issue. I own some Citibank stock, but agree with many of the comments that it is a hugely risky investment. I doubt any one individual has enough information to understand Citibank's business, let alone the composition and quality of their assets. My only basis for owning this stock is that at current prices, the stock trades at a very low multiple of its' twenty year average earnings. The risk, as I see it, is that Citi will never earn anything close to what it has earned over the past two decades, and that it may yet go bankrupt or end up in a "virtual" bankruptcy situation like GM. I agree that Treasury would no doubt enjoy owning some upside if they are to take low quality bank assets onto their books (whether by guarantee or otherwise), but I do not share the view that Treasury so much as gives a passing thought to sharing any such upside with other holders of Citi common. Let's hope the author's predictions come true, but I wouldn't base an investment decision on such hopes alone.

Mar 31 11:07 AM

[Fremont Rea...:]

I agree with Jonathon Christopher, you're buying a call option, however, I'd say with the recent talk from Obama and Guitner, there's a good chance this call option could expire worthless, if Citi's fortunre don't improve by the next 6 months. Everyone is talking about the need to let banks fail, if they are insolvent, and Citi may be the first candidate.

Mar 31 12:06 PM

[vodop09798:]

It's so good to hear comments that run 1 short, 7 bulls, and one fence sitter. Most I've read run the other way around. But don't forget, folks, the Short Interest on Citi is over 18%. THEY'RE BACK.! Still trying to kill another bank and start another mess. Keep buying. That'll make them cover their assets.

Mar 31 12:40 PM

[ETFtrader:]

I have made money with C, trading on market news and things of that nature. I would never hold it overnight, and will never trade it again, because the stress level while I was holding it, even if only for ten minutes, was so incredibly high. As the stomach churns...
I have no further plans to trade C, BAC, etc. It simply isn't worth it. Talk about zombie stocks.

Mar 31 02:25 PM

[HBWOW:]

Has the government considered an investigation into the specifics of Weil and Pandit' worth? Or Chris Cox for that matter as well? OR DO THESE FINANCIAL WIZARDS (Cox simply observe) JUST ACQUIRE TOXIC ASSETS FOR THE MERE THRILL OF THE GAMBLE AS DONE IN VEGAS? The government, the investment firms, and particularly Congress, SEC, the FED and Treasury Secretary all know who the troublemakers were and are, BUT DO NOTHING ABOUT THEM.

Mar 31 03:40 PM

[Cabgi225:]

You fucking thief Jordan!!!! You swiped this word for word off the Yahoo C board. What a chump.

Mar 31 10:28 PM

[sr9web:]

GE went it went under $6 was a way betterinvestment than C will ever be. At this point C is nothing more than sheer speculation.

Mar 31 11:15 PM

[mpharbold1:]

If C survives, than the US taxpayer is really getting screwed with the toxic assets. C and the tax payer cannot both win here. I'm routing for the more honest taxpayer. Death to Citigroup! God Bless America!

Apr 01 12:11 AM

[Lightway:]

Check this out, Citi is saying themselves to buy bank puts because they expect a big retreat in the financial sector. Not sure what's going on here, but there's something not quite right about this:

www.bloomberg.com/apps...

Apr 01 04:24 AM

[Jacob Jordan:]

I actually posted my article on thelion.com, yahoo.com, and google.com. My username is thejaykob. Does this mean you accusing me of plagiarizing my own article?


On Mar 31 10:28 PM Cabgi225 wrote:

> You fucking thief Jordan!!!! You swiped this word for word off the
> Yahoo C board. What a chump.

Apr 01 01:27 PM

[Moresby:]

Since when has government been good bankers?
How can a run bank co-run by the government be good for the share holders who are accounting for only for 15% of the stock?
With the governmet in the driving seat, the bank will not be watching the bottom line, the profit/loss; it will become a kind of social service, lending money to projects that are politically correct instead of economically viable.
I don't know, may be with the Obama government, a new economic fundamental is in place...... I sure like to see how it works.

Apr 01 02:47 PM

[bcncv:]

Although I haven't touched Citi yet, I've been looking at long term call options on speculative stuff like this. I think the risk/reward profile of options fits these types of bets much better than owning shares.

Thanks for the article though, it's some good food for thought.

Apr 01 06:59 PM

[E.D. Hart:]

There is no way to value the company realistically. Its hope over reason. Avoid this stock, unless you want to speculate.

Apr 01 09:30 PM

[whisperonth...:]

Lightway, if you had read the whole article, Citigroup was talking about another bank. READ.

Apr 01 10:40 PM

[whisperonth...:]

Lightway, if you had read the whole article, Citigroup was talking about another bank. READ.

Apr 01 10:40 PM

[Mark Bern:]

Well, I can only say that I have made nice profits on Citi put options in the past. If I play it now, I would be looking for relatively quick trades in either direction playing off the headlines.

If I had held this stock all the way down, as some have, why not hold on and hope for the best. There really isn't much downside on a percentage basis at this point. As for initiating a long position to hold long term, I would call that very speculative and use "Vegas" money only that I could afford to lose. I would also keep the positions small relative to the size of my overall portfolio.

The concept that the government provides protection because it holds nearly 40% of the common can cut both ways. Yes, government has a vested interest so it will want to keep Citi afloat in some form. But that doesn't mean that the government would be wiped out in the case of bankruptcy along with the rest of the shareholders. And the government would also not be wiped out in the case of nationalization. Just because government officials have said that nationalization is off the table doesn't mean it is. They've been known to change course several times. A good example is GM. Bankruptcy seemed off the table for GM not too long ago and yet, here we are again.

We'll go where we have to go to get through this mess and who knows where that will lead Citi? I'm sure I don't know. With Alt-A, ARMs, and Commercial Real Estate defaults looming in the wings along with a continuing drop in residential real estate values I just can't get excited about the longer term prospects. I like to invest in companies of which whose futures I am fairly certain. This seems too much like gambling than investing to me.

Apr 02 12:24 AM

[The Sim:]

if those assets are so valuable, wouldn't it be more profitable for the government to put citi into receivership and wipe out the equity side?? this is like paying the left pocket from the right pocket, and calling it a profit! isn't that what bernie madoff did??

Apr 02 12:30 PM

[damienhaas:]

Sound like an ostrich head stuck in the sand...........

Apr 02 07:09 PM

[User 305589:]

well, downside 2.65$, yes - equal to 100% of capital invested.
potential upside $40 ??? sure, it can go there. but when it finally does, you will likely have to pay $5000 per ounce of gold and a berkshire stock will have surpassed the 1 million treshold.
don't hold your breath, though.


On Mar 31 08:50 AM Jonathan Christopher wrote:

> The current Citi stock should be considered a Call Option with no
> expiration date. The potential down side is $2.65/ share. The potential
> upside is around $40 a share. No-one can predict the future of this
> stock, There are too many unknowns and uncertainties.
>
> I have a small stake in this stock.

Apr 03 04:25 AM

[tedstr:]

No one mentioned that 5% of Citibank is owned by Saudi Prince Alwaleed bin Talal who is $8 Bil underwater on this deal. Don't you think he want's his money back? At least some of it? Do you think Barrack Hussein Obama wants to nationalize the Saudis? I think not.

Apr 03 08:58 AM

[Hamza:]

First of all, nationalization results in government ownership and loss for the common stock holders. No matter how you slice it, 40% steak and a $2 stock IS NATIONALIZATION.
Secondly, there's absolutely no reason whatsoever to buy citigroup as it is probably the worst financial stock (and the stock price/amount of gov. aid proves that). This article is on the main page of seeking alpha and I must say i am disappointed in the website to let people like yourself with no market experience or (reading from your profile) even working in the financial sector to write any articles and making stock recommendations. It is partially because of people like you that regular investors with limited market knowledge are victims of buying companies such as citigroup.

Apr 03 03:30 PM