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