Citigroup: Priced to Succeed

I took on a position in Citigroup (C) a couple of weeks ago. This is a purely speculative play on the bank Warren Buffett negatively compared to Wells Fargo (WFC). Far be it from me to doubt Buffett's wisdom, but I believe the problems he has cited may soon disappear. I don't have anonymous tips from government insiders, nor do I have have a wire-tap on Geithner's telephone. What I do have is some inductive reasoning.

First and foremost, C has received a LOT of capital. The fact that it has been able to successfully raise so much money without (too) much uproar in the media points to a certain level of investor confidence - or simply that the public realizes that most financial institutions are basket-cases and no longer differentiates between them. The result of all of this negative sentiment is that even though C has made deals that allow it to meet and exceeded capital requirements, C has still been priced at pre-bankruptcy GM prices.

Second, C has organized its management and its corporate structure. I believe Dick Parsons is to US businesses what Kofi Annan was to international politics, and to have him on C's board is definitely a boon and a calming presence.

Vikram Pandit has proven himself to be a survivor and has received Parson's endorsement, even after months of the media calling for his and K. Lewis's heads at BofA (BAC). Apparently Parsons also brings some heavy and influential government connections along with his sparkling resume, and given C's situation at present, will probably be the one making the crucial decisions while the government retains its minority stake.

This is important because the government will be the key player while it holds its stake, and it certainly does not want to hold on to this stake forever.

What is also interesting to the casual observer is how C is now Citicorp and Citi Holdings:

The former is a moderately successful bank with a most respectable earnings stream of just over $3 billion for Q2. Let's just look at this side of C for a second. A P/E of 10 annualized over one year would place Citicorp's market cap alone at $120 billion. Remember that this half is supposedly devoid of toxicity, and that these profits are bread-and-butter banking operations sans exotic FWMDs (financial weapons of mass destruction).

Now for the other half. Anyone remember RTC? Long story short (courtesy of Wikipedia),

The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s.

Over the course of 6 years, the government wound down the mistakes, follies, and stupidities of an entire industry by assuming responsibilities for assets that would have turned ordinary institutions insolvent.

Sounds familiar? With the government's staying power, it successfully turned these toxic assets into a profitable endeavor, and everyone was pleased with the results.

There was a lot of talk about an RTC-style institution months ago to dispose of assets held by the zombie banks - and now here we are with AIG and Citi Holdings.

Yes, the government owns 34% of C's outstanding common, which now number 22 billion shares. But, do you see what I see? Can you connect the dots between 7 billion shares of C, now valued at about $20 billion, Citi Holdings, and an RTC-style government institution with Citi Holdings as the liquidator?

This is the event to watch for, in my humble opinion. The government could care less about its ownership in C - it wants public support. The public, American to the core, wants the government as far away as possible from business ownership. Add two and two together, and Citicorp may become a private institution simply by spinning off Citi Holdings to the government - so conveniently packaged as an RTC-style institution - for, gee, its 34% stake in C. C wins, the government wins, and everyone's happy - and Parsons' star rises even higher.

Let's say this happens. Citicorp, the private company, is currently worth $120 billion, as we already discussed. With just 15 billion shares, this yields a per share value of $8. It's currently trading at $3.50.

This is obviously a rosy scenario, but all the dominoes are set to fall for this to happen. You have a very popular and effective government insider calling the shots at C, competent management in place post-spin-off, a government that has been very proactive in dealing with this crisis and would like it done and over with ASAP, and a exercisable solution that seems to be all but set to execute.

Situations like this, if they come to pass, also promise brighter times for the economy as a whole, as the healing from this crisis would be complete with the liquidation of entities like AIG and Citi Holdings. More than likely the market as a whole would revert back to a more justifiably bullish stance, and we as a nation would see better times ahead.

Bottom line, C is now worth a small fraction of what it was worth at its height. I believe this speculative case for it is valid, and may come to pass in the foreseeable future. Even a hint of it would send C up higher from these pre-bankruptcy prices. If you have the stomach for it, I wish you luck for what promises to be a very wild ride.

Disclosure: The author has sold LEAP puts of C @ 5, and used the (very large) premium to purchase LEAP calls of C @ 5, both expiring Jan 2011. The author hopes this strategy limits downside exposure in case the stock does not pass 5 in this time frame, while giving him a large, leveraged, and sizably bullish position in the company.

Comments

[al s:]

Your comments are frightening !!!! Good Q2 earnings ? True operating results were a loss of mearly $3 BIL.
Dick Parsons a leader, a good manager? Are you his PR head?
There is over $1 Trillion off the books of crap that will come onto the books at year end, and oh, that little thing called massive common dilution.
Yeah, C is right up there with JP Chase and other well run companies !!!!!!1

Aug 06 09:14 AM

[aaavoid:]

So you are saying spin off citi holdings to government? Which means taxpayers get to keep toxic assets which the irresponsible bankers created out of convenience? So now your scenario is such Citi holdings is off the books, but at what price? You make spinning off sounds so easy it's almost lame. Worst post on seekingalpha to date.

"Add two and two together, and Citicorp may become a private institution simply by spinning off Citi Holdings to the government - so conveniently packaged as an RTC-style institution - for, gee, its 34% stake in C. C wins, the government wins, and everyone's happy - and Parsons' star rises even higher."

Aug 06 10:59 AM

[Ricard:]

LOL, good. I'm almost glad this article is attracting vitriol. That proves that most people have not even considered this possibility.

al s:
You're looking at the company as a whole minus the smith barney transaction. I know things look bad when you consider Citi Holdings, and if you insist upon seeing the company in this manner, you will probably not want to hold C.

Parsons did a magnificent job with the disaster that was the Time Warner/ AOL merger. He has earned credibility in my book, and I've linked articles to demonstrate that he's probably the right man for the job. Obviously there's quite a bit of me talking book, but I've come out on top 70% so far on this trade, so I feel pretty good about it, good enough to write an article that I knew would attract venom.

aaavoid:

C attracted nearly 60 billion in capital in a pretty simple manner. RTC was created and resolved in a similarly simple manner. Things happen, and problems get solved.

The hard part has already been taken care of IMHO, identifying the problem. That's the essence of Citi Holdings.


Bottom line, the above two comments aptly demonstrate why C is priced where it is right now. You can either wait on the sidelines for the momentum play and miss another 200% pop, or you can take a risk and buy C now. So far, I'm already very satisfied with my gains, but I am looking for a 10 bagger on my LEAPS.

Aug 06 12:58 PM

[aaavoid:]

Still doesn't make sense. How does passing up trillion dollars of toxic assets to the government/taxpayer solve the problem? What does the government/taxpayer do with the toxic asset? That would be as easy as cutting off a big cancer lump and still being able to survive. I haven't seen such miracle. You can only sell/spin off an asset if someone sees a value in it and is willing to buy it.

Aug 06 01:26 PM

[Ricard:]

I understand your hesitation. This is not for the faint of heart, nor is it for a core position in any portfolio.

Look over RTC's history - it may shed some light on this topic for you. That entity shed some $300 bn worth in toxicity when such a number was unimaginable. It was a sterling success and set up the bull market of the 90s. You may make the argument that RTC acted post-bank-failure, but in a sense, C has already 'failed' and entered 'receivership' through massive government intervention (second only to AIG). It just so happens that this particular type of receivership hasn't wiped out the common (outside of 80% dilution, already factored into my numbers), and probably won't in the future. What that means is that the worst is over, and that the news can only get better from here. Again, I am speculating here...this is not typical of my investment style. My position is appropriately small, although very leveraged.

As far as how this intervention solves the problem, even today the government's solvency is much less of a question than it is for any private institution. The government has very deep pockets (taxes) and when committed, can more or less solve problems of this magnitude just by waiting the crisis out. Most private companies would try to do the same, but they are already insolvent, and cannot afford to wait.

The consensus is that these assets are toxic because the market disappeared for them (no liquidity), and the government's injections have masked this problem for the time being until the markets for these products re-stabilize and can be wound down in a proper fashion. That's is more or less what RTC did, and IMHO what the government will probably attempt to do with Citi Holdings.


On Aug 06 01:26 PM aaavoid wrote:

> Still doesn't make sense. How does passing up trillion dollars of
> toxic assets to the government/taxpayer solve the problem? What does
> the government/taxpayer do with the toxic asset? That would be as
> easy as cutting off a big cancer lump and still being able to survive.
> I haven't seen such miracle. You can only sell/spin off an asset
> if someone sees a value in it and is willing to buy it.

Aug 06 01:46 PM

[Tack:]

A nice piece of speculation. The even better news is that C is underpriced, even if none of what you posit comes to pass.

The incredible --well, maybe, not so incredible, given people's lasting predilections for believing the worst-- truth is that much of that "toxic" debt is going to be garden-variety, performing debt that makes lots of money for anybody who had written it way down or for any vulture capitalists that were fortunate enough to acquire it on the cheap.

Just as the RTC experience demonstrates, "toxic" debt will prove to be a very profitable business. That's why nobody's rushing to give it away, although lots of monied forces would love for the government to force banks to do so. (P.S. They may be aided and abetted by the FASB, if they issue an insane new mark-to-market mandate. We'll see.)

Citi is also the world's largest issuer of credit cards, and already we're seeing that early-stage credit-card deliquencies have declined five straight months. This is good news for Citi's outlook.

Additionally, Citi has the largest worldwide banking network of all U.S. banks. The benefit of this position will soon become readily apparent, as world economies recover, and the dollar declines versus other industrial currencies. Citi's large overseas earnings power will prove very attractive when repatriated at increasingly favorable exchange rates.

At $3 and change Citi looks like it could be a much larger percentage winner than most any other bank for any investor who can see past the current media rhetoric.

Aug 06 05:48 PM

[Ricard:]

I'm glad you agree. I still think something has to be done about the 34% govt ownership, and this seems like the no-brainer solution - something that has been planned for and thought out well in advance. If the government actually keeps its stake, confidence will not return to this company. The government has to punch out, and Citi Holdings gives them the perfect excuse to do so.

On Aug 06 05:48 PM Tack wrote:

Aug 06 10:37 PM

[options:]

Thank you for the post--very interesting. I'm interested in your Disclosure section and want to make sure I understand. You've sold the right to sell at $5, so if in Jan 2011, C is less than $5 (say, $2), the purchaser will exercise. Your right to buy at $5 will go unexercised because it's out of the money. So, in this situation, you're left selling at $5 and purchasing at $2, losing $3 per share. This sounds risky to me. Is the idea here that the net positive difference in premium helps to mitigate this situation which you view as unlikely anyway?

And then on the other side, say C goes to 10 by Jan 2011. Then the put will go unexercised because why sell an asset for less than it's worth, and you keep the right to buy at $5, so you're making $5 per share, plus the net positive difference in premium?

I think i've got this right, but it would be great if you could confirm! Finally, how did you leverage the position? Thansk!!

Aug 06 10:59 PM

[Ricard:]

Good questions.

The puts are cash-secured - I absolutely refuse to use margin for any of my activities, and use options as an alternative for leverage. I'll explain this later.

The trade was to sell Jan 2011 puts @ 5 on C for about $2.85. I then went around and used the entire premium to buy Jan 2011 calls @ 5 on C for around $0.45 in a multi-legged option trade. I believe C was trading around $2.65 the day I did the trade, so there was a substantial time premium I gained through writing the puts even though they were in the money.

Admittedly it would be difficult for someone at this time to copycat the trade, and at least on articles, I will probably always stick to late disclosure so that I give myself time to assess and fortify my own opinions on what I did - I have been at least commenting on my purchase on C for a good 2-3 weeks now. Still, there every possibility that this trade may materialize again in the near future, so being aware of the possibilities even if they've passed may yet prove useful.

If C goes to 2, you're right - I will be forced to buy C @ 5 to cover for the outstanding contracts, or buy them back for the same amount I spent on my calls - this will more or less result in a 60% loss on my secured cash. Not good, but not nearly as bad as if I just bought C calls outright (100% loss). Had I bought the stock, I'd still be looking at a good 30% loss.

If C goes to 5, I will break even - the puts and calls will be worthless. Again, this is much more advantageous than outright buying calls, because had I done so, I still would have lost 100% of my cash. Of course, buying the stock would have yielded a 100% gain, but I am looking for C to go well past 5.

If C goes to 6, the calls appreciate at least 150% from my original purchase price. My return on the secured cash would then be about 100%, maybe a little more - this is a 2x bagger.

If C goes to 10, well now. The calls appreciate at least 1200% from my original purchase price, for a very nice 10x bagger on secured cash. I believe C will fall somewhere between 6 and 10 before Jan of 2011. Of course, I won't mind if it exceeds my expectations.

The leverage comes into play when you compare this transaction to buying the stock outright. Had I just bought the stock when C was at $2.65, I would have earned about 40% as of this day. However, my real gains are already close to 80% on my original secured cash, mainly due to the substantial appreciation in the time premium of the calls (the calls have already more than doubled in value). If C goes to 6 before the end of the year, I would have earned over 100% by buying the stock outright, but my options will more than likely appreciate several times this amount, again due to the time premium on the calls. I probably don't need to explain the leverage at 10 - on the stock, it would be almost a 4x bagger, but for the options, it would be a 12-15x bagger at the very least for the same amount invested.

I used this leverage for a reason - if C doesn't do what I hope it does, I believe it will more than likely do the opposite - my position will probably be wiped out no matter what strategy I use, even just buying stock outright. Therefore, the leverage allows for out-sized gains for the same risk profile. It also minimizes the capital I need to allocate up front for this transaction. Had I used margin instead of options for my leverage, my position would have to be very large for the same effect, and I would run the risk of a margin call - probably the most destructive outcome for any investor, especially if you combine the leverage of options with the leverage of margin.

One last thing - notice that if C goes to 5, the puts will expire worthless - that means that had I not used the premiums to buy calls, the cash I used to secure the puts would have earned a 60% gain during this time frame. A 60% premium is usually unheard of unless you go very deep in the money. For C, it just doesn't matter - you just can't go very deep, and yet you can still bag these kind of premiums.

I used cash-secured puts liberally in Jan-Mar of this year on similarly low priced stocks with stellar results. Although C carries a higher risk profile than my puts back then, I've also committed a lot less capital, and utilized the premiums in a much more leveraged capacity.

So, I hope you can see now why this is a very speculative and highly leveraged transaction. I baked some protection into the trade by writing the puts, but in the end, it's still a hail-mary, and I'm comfortable with it.

Good luck with your trades :)

On Aug 06 10:59 PM options wrote:

Aug 07 12:11 AM

[Ricard:]

LOL, wow...I was hoping I could avoid writing such a lengthy comment about my disclosure...c'est la vie.

Aug 07 12:12 AM

[User 467679:]

thanks for the detailed explanation. I didn't understand options much, but I'm beginning to now.

Aug 07 08:26 AM

[ComdtyBoy:]

By selling puts and buying calls, all you've done is synthetically gone long the stock -- and increased your transaction costs.

Aug 07 08:29 AM

[TeresaE:]

Your speculation is that today is similar in nature to the yesterday of the RTC. You could not be further from reality.

In the early 90s, we had two things coming into play that we do not have today. These two situations propelled America into our greatest peacetime expansion since WWII ended.

The two things were the dotcom/IT bubble AND Y2K. They both created multi-trillion dollar industries employing millions of Americans.

The difference between Y2K and the chase after "green" and health jobs is vast.

We had American manufacturing employing a vast number of our citizens IN ADDITION to the technology boom.

We no longer have that.

And the toxic assets will NEVER be as profitable as in the good ole RTC days.

Does this mean that Citi will NEVER go back to their previous glorious stock price days? Probably not, but that is only temporary.

So, you may be right about your speculation, the market is so manipulated that who knows who will be the ultimate winners and losers. That is the call for Mommy/Daddy Government to decide.

Good luck with your plan. Let's just hope those dollars you potentially earn are worth more than the paper they are printed on.

Aug 07 08:53 AM

[Fabien Hug:]

Go C, Go. I'm long too.

Aug 07 08:57 AM

[Maxe Paul:]

Seems to be the exact type of dodgy bet/s that got the banks in trouble in the first place, better you than me.

I would not touch a US financial if you paid me.

Do yourself a favour and buy a quality Australian mining company sitting on zero debt.

Aug 07 09:00 AM

[tedster98:]

citibank like most of the other banks were forced to make irresponsible loans under penalty of law by the community reinvestment development act sponsored by democraps. In addition, they made other irresponsible loans on their own while speculating on the housing bubble. Now these banks are in bed with the government under TARP instead of filing for bankruptcy like any other business should whose management cannot turn a profit. Now the bank is owned by one of the most far-left and socialist crackpot administration this country has ever known.

Politics aside (and my blood boils with rage against Marxists), the bank is poorly managed, the books are totally cooked and diffiused with government entanglements and mystery. NO ONE truly knows what the value of the business is, but it cannot be good.

I sold off Citi early last year avoiding this pitfall. I even made a small profit - only to lose it by gambling on WaMu - a terrible mistake.

When you mix politics with sound investment, usually the investor loses.

Every single OCommie play that I have invested in either LOST money, or I barely broke even.

This one is a NO and only a fool will bite.

Aug 07 09:18 AM

[1mania4u:]

The only thing that is truly important is what does the Government want Citigroup stock to do. Since we, as taxpayers, are already in the game for hundreds of billions invested into C, the only way to recoup that money is to keep Citi alive as a functioning and, hopefully profitable, entity. The federal reserve controls our monetary system effectively as a giant hedge fund with unlimited financial resources, i.e. the ability to print money. As long as the the global financial system will tolerate this strategy, they can do whatever they want and pick and choose who survives and recovers and who does not. The true concern that nobody is really talking about is the possible unsustainable nature of this type financial system in a world where the global economy has become the true governing body that all sovereign powers are actually beholden to. We may reflate our way out of this toxic financial mania we created, but the problems do not actually go away, and they are getting larger under the surface. In an age of electronic credits where more and more participants view money as a game rather than a system to facilitate commece and account for obligation between real people, we are slowly witnessing a diminishing trust in the system with each bubble episode.

To quote Pogo, "We have identified the enemy, and he is us".

Aug 07 09:23 AM

[Kansas City...:]

TeresaE-
In hindsight we had huge growth because of the IT industry, but around the RTC time very few people saw this, which is why people who bought the MSFT and other small guys at the same time made outrageous life making profits. Now, maybe it isnt the green industry, maybe its something we cant see that will grow the economy. Hell maybe we grow sideways like the 70s (my portfolio is planned for this). But in the early 90s no one saw the HUGE growth in IT, this by no means we will not see a huge growth in a sector we've barely heard of. I love the strategy because if you are going long you are going big. It is pure speculation and well done from an option point of view. Good insight on the article

Aug 07 09:26 AM

[Vegasjoe:]

well said!


On Aug 06 09:14 AM al s wrote:

> Your comments are frightening !!!! Good Q2 earnings ? True operating
> results were a loss of mearly $3 BIL.
> Dick Parsons a leader, a good manager? Are you his PR head?
> There is over $1 Trillion off the books of crap that will come onto
> the books at year end, and oh, that little thing called massive common
> dilution.
> Yeah, C is right up there with JP Chase and other well run companies
> !!!!!!1

Aug 07 09:37 AM

[Listerwato:]

I had a position in C pf that I exchanged (at no cost) into over 14,000 shares of C. My cost per share after the exchange is $2.51. As of today the stock is at $4 and I'm a happy camper. Question to all you knowledgeable folks out there. What should I do now? Sell about 9000 shares and recover my original investment. Hang on with all stock till?Your thoughts are welcome. Thanks

Aug 07 10:09 AM

[options:]

Thank you for taking the time to write such a helpful explanation--this is great!


On Aug 07 12:12 AM Ricard wrote:

> LOL, wow...I was hoping I could avoid writing such a lengthy comment
> about my disclosure...c'est la vie.

Aug 07 10:15 AM

[WhoisJohnGalt:]

I can't agree completely with your arguments, but people like you make it feed my trades on C and BoA as they bounce between their respective wide trading ranges.

Aug 07 10:43 AM

[Kimball Corson:]

I think you are absolute right. You won't see C at under $5 for long. It still has it brand and wide geographic reach in tact. No bank can match it. Although shares have been diluted, it was for a like amount of badly needed new capital. I would also look at FNM whose losses just jumped big time but which is selling for < $0.70. That price can only go up and FNM is not about to be abandoned by Uncle Sam or fall into obivion. That is clear. All of these are just like the days of seeing BAC at $4, AIG for < $1 and GE for peanuts. I couldn't get enough of them at those prices.The idea here is to buy companies on the cheap that are still going to be around and fair better as the economy recovers. Don't let the growling bear chant of doom and gloom destroy your chances of making some real money.

Aug 07 11:35 AM

[secmaven:]

Bank of America needs a worthy competitor in the retail market and C is it. The government is going to do whatever it takes to nurse this bank back to health.

Aug 07 12:10 PM

[capital pains:]

Well why not C !.If garbage stocks like LVS and MGM have risen 8 to 10 times, why shouldn't garbage like C go to $15 ? Besides, the taxpayer is always the ultimate backstop for banks . Since the commerical real estate market (the supposed other shoe to drop, once upon a time) has maintained as if nothing mattered, then C and all the other horrendous banks should continue to prosper with the Fed's complicity. Since toxic assets have been relegated to the trash bin, and mortgage defaults don't count for much anymore, how can C be anything but a marvelous investment !

Aug 07 12:39 PM

[Ricard:]

This has turned into a lively discussion overnight - thanks to all who contributed.

ComdtyBoy - Although the transaction costs are noticeably higher, the leverage is the reason why someone would typically put in an options order. 1) The cash I used for the calls came from the premium I gained by writing the puts, 2) the calls leverage my position about 3-6x what I would have had buying the stock outright (with no counter-party risk, since I am cash secured), 3) the puts give some downside protection below 5, and 4) I am comfortable with a 1 1/2 year time frame.

TeresaE - I echo Kansas's comments regarding the subsequent tech boom; it's hard to see events like that coming. Regarding Y2K, had that been confined to the government sector, that would have been roundly scoffed at as a mere bug fix and more proof of government ineptitude. Its timing with the greatest party event in our lifetimes masked this embarrassment quite well.

Regarding your macro picture, I assume from your comments you are long gold. Well, then you'll probably disapprove of any of my stock picks over the past year, and have probably missed out on one of the best fundamental rallies of this generation, all the while holding gold, which gives no dividend, and no real appreciation in spending power (gold is a store of value, not an investment). In fact, GLD consumes itself over the long term...not my definition of a sound investment.

Agreed that US manufacturing is weak, but given our global economy, the US is not the only market to look at...

1mania4u - agreed that we need some sort of change from our current way of doing business. I advocate a weaning from the Fed and (much more importantly) an individual accounting and taking of responsibility for messes like this:
seekingalpha.com/artic...

Listerwato - you needed to plan for an exit strategy before you entered. Mine is to buy back the puts along with enough calls to break even once C passes 5. Then, my remaining calls will become 'free' as I would have already recouped my investment through the now nearly-worthless-puts. I've done this enough times (and fallen on my face enough times) to know that I needed a clear plan for going in AND going out.

To answer your question would require looking at your overall portfolio, determining how much risk you are willing to stomach, and how well hedged you are against what you may see coming in the future.

Kimball Corson - AIG is still at $1.50 pre-split. I've begun looking at this one as well. Apparently I am one week late, lol.

To everyone else, good luck on your trades :)

Aug 07 12:55 PM

[AndrewBaker:]

The financials, particularly the banks, are living in Halcyon times courtesy of the government, the Fed and the clique of bankers and financiers who all stand to make out of supporting bust businesses with our tax dollars: it won't and won't be allowed to fail anymore than any of the other outfits protected by the coterie that together and individually get their goodies before anyone else, and publicly show us how good they are in doing stuff to make it all good for Main Street.

So, you can bet that the stock price of Citi will prosper, regardless of hidden bad debts and as-yet unknown and yet to be bad debts. Toxic assets will be paid for by us whilst not-so-toxic ones will be sold within the coterie at a price beneficial to both parties, and enabling profit to be shown in their respective accounts and balance sheets.

One day it will all come home to roost: but by then the insiders will have sold on their stock. So, buy now, and keep a watchful eye on events to make sure you too can sell out before the fall (the season or the event, take your pick).

Aug 07 02:14 PM

[KAIMU BIZ:]

ALOHA !!

Quite simply this is a trading tip and has nothing to do with the US government adopting fiscal restraint and responsibility. What the US Banks have done is use their power status in Washington DC to influence the socializing of losses and the pimping of accounting principles. What was once GAAP, in other words "Generally Accepted Accounting Principles" is now reported in the optional "NON-GAAP", in other words "Generally Unaccepted Accounting Principles" or GUAP" ... If FASB were a poker game then all red cards would be wild. So in this new World of business principles, that could only have been envisioned by George Orwell, we have a transference of the TOO BIG TO FAIL business model that was once the turf of bloated and risky US Banks, whereby the US government is now recognized worldwide as the epitome of TOO BIG TO FAIL. Here now we have "short term" trading tip being leveraged on the backs of the Youth of America who have yet to have a say in what is fiscally responsible and what is not. The solution is to "SPIN IT OFF"! Whats is SPUN OFF is the irresponsible spending and DEBT of a generation that grew up with Capt Kangaroo and Gilligans Island educated in State sponsored schools where we were taught that government is our Savior. How many of us would have ever thought that somehow we'd all be day trading our way to retirement? There is something that is patently "evil" about that concept, especially since you have to consider who it is that controls the gates to the Casino.

Referencing the Resolution Trust Company is a joke, then why not reference the one before that and the one before that, start with the Hoover con called "Reconstruction Finance Corporation" then go backwards from there. All these GSE companies do is forward sell failed debt(malinvestnments) using inflation, which devalues the purchasing power of the US Dollar. I call that "embedded inflation" and it is "embedded" because each succeeding generation refuses to pay down anything and actually increases the DEBT load of future generations. .

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."-Thomas Jefferson

The last American generation that followed Jefferson's advice was in 1835.

To say that C has been well managed or is the hands of excellent managers who know how to "survive" is so completely asinine I can hardly comprehend it! Just how is it we got into this financial crisis if all the "experts" are such "experts"? Is that what we are reduced to in American business now ... "survival"? Where's the long term plan for self-sufficiency and adept innovation and grassroots growth from manufacturing or are we going to suckle at the government's teat until its shriveled and empty? I would say that if we shrunk government and took away government contracts and largess that the Fortune 500 would end up being the Fortune 5! Is it any wonder that without the US government growing its DEBT LOAD exponentially there would be no US economic growth. What kind of country builds its future on massive DEBT? I would hazard a guess that the author of this trade has never even seen a days worth of spending as reported on the US TREASURY DAILY STATEMENT. I would also guess his reply to that concern would be "so what"!

So the advice is "Jump on in the waters fine, we'll let some other sucker worry about C when we're done with it!"

The infamous words of John Connolly, US Tres Sec under Nixon back in 1971, have come home to roost, "Its our dollar but its your problem!" So now the US Banks are telling the American taxpayer, "Its our counterparty risk, buts its your problem!" Do not get fooled because the US Banks are not just telling the American taxpayer its our problem, they are saying this to the American youth who will inherit the toxic garbage that has been cleansed for generations using the "garbage disposal" of the money supply known as monetary inflation.

Trades in C are trades in "false wealth", they are trades against our kids future. Take the $$$ signs out of your eyes for once in your life and look in the mirror of reality, because in the end you are fooling yourself if you think this sort of "trading" is anything different than what the traders of ENRON were doing behind the facade of "profits are okay at any cost"! Like an alcoholic might say, "Next rolling blackout please and make it a double!"

ALL OUR BEST THINKING GOT US HERE ...

Aug 07 03:29 PM

[Ricard:]

On Aug 07 02:14 PM AndrewBaker wrote:

> The financials, particularly the banks, are living in Halcyon times...

I agree with most of your comment, although this is not an article about the state of our economy or the financial industry in general. I believe there will always be problems that remain hidden, and that investing is not about black and white, but shades of grey. What I see here in C is an artichoke, which is mostly inedible, until you peel the layers of garbage to get at the heart. I believe the minuscule market cap of C gets to the heart of the value play, and will one day grow to be substantial, and that the government will find it in its interest to carry out this goal.

Regarding insiders, that is IMHO the main problem with American business today - insiders used to be the heart and soul of the corporation (AMZN, AAPL, for instance), yet in today's environment, most corporations are run by management that own less than 5% of their charge. It's the Gordon Gekko argument, although I do not quite approve of his tactics. Be aware of the corruption, navigate through the morass, do not let the sludge onto your own ship, IMHO.


On Aug 07 03:29 PM KAIMU BIZ wrote:

> Quite simply this is a trading tip and has nothing to do with the
> US government adopting fiscal restraint and responsibility.

That is correct. I am an investor - I am not a legislator trying to craft government policy, and I thank the stars for that. What I do believe is that with crisis comes opportunity, and I have taken advantage of numerous opportunities in the past year as they presented themselves. C is the latest example (although it remains to be seen if I am correct on this one).

Although I respect your emotional outburst on the failings of our government, I do not believe that such emotion is conducive to investing in general. I do believe that stances like yours are baked into the 94% decline in C's stock, and that one day, more positive news will also eventually find its way into the recipe.

Aug 07 03:58 PM

[KAIMU BIZ:]

ALOHA !!

Correct me if I am wrong but I do not call what you do as "investing", in fact you yourself call it "trading". It is trading prices and that is all it is! Hopefully for a profit ...

My suggestion that you miss is that I have nothing against "trading", but trade companies that have not been the beneficiaries of government and US FED largess for their entire business history. These are the banks and insurance companies that counted on the TOO BIG TO FAIL policy to "survive" and I guarantee that these same institutions will be at the trough sooner than later.

What you are telling us all to do is "gamble" with risky companies who have repeatedly shown they have no expertise at risk management. What I am saying is "gamble" with companies who did not need TARP, companies like Exxon or Apple or BHP or Microsoft, companies with long term proven track records that required no government BAILOUTS to "survive"! Heck, I would even go so far as to say regional US banks or foreign banks that never needed a BAILOUT. One that comes to mind is Bank Of Hawaii or almost any of the Canadian banks.

In laymans terms you are asking us to play Russian roulette with 5 bullets in the revolver, with the options hedge as the one empty chamber. I am saying play Russian roulette with one bullet!

Buy and trade companies that operate in "real wealth" terms where they actually sell products that you yourself use in your daily life, the basics you need to "survive" not what C needs to survive.

Ricardo, what's so emotional about that? If you want high emotions then take the "wild ride"(as you describe your trade)and buy C at bankrupt levels, support companies that know how to work their way around bankruptcy and hidden corrupt agendas. These companies like C exist on WHO YOU KNOW ethics. Is that what the American Dream is now?

If your gamble pays off then what? Whats the next one? And the next one? Should we all quit our day jobs and day trade with you? I mean what sort of life is that mate? I guess if we all want the retirement that our Fathers had or our Fathers Father had then we best get into high risk mode and make up for for all that lost purchasing power of a US Dollar.

You're day trading high risk and moral decay ...


On Aug 07 03:58 PM Ricard wrote:

> On Aug 07 02:14 PM AndrewBaker wrote:

Aug 07 04:31 PM

[Ricard:]

I originally labeled you emotional because your post had nothing to do with the company highlighted in this article. Not because you had anything against 'trading', not because someone is handing you a loaded gun. Although, if you equate speculation to Russian roulette, I suggest you don't do it, for your own emotional well-being.

I believe this speculative 'trade' has sound fundamental foundations if you discount Citi Holdings as already being this 'government bailed out institution' that you seem to equate to 'day trading' and 'moral decay'. I am not buying this portion of the company, and if you have read my article and understand my reasoning, I hope you can at least recognize this part of my argument. I do not think C deserves to have a large part in anyone's portfolio, but I am now repeating myself.

I am not sure what your agenda is, but if you have a problem with the trade, I suggest you keep your arguments at that level. To think that I should be writing financial regulatory reform packages is not a reasonable expectation.

On Aug 07 03:29 PM KAIMU BIZ wrote:

> Quite simply this is a trading tip and has nothing to do with the
> US government adopting fiscal restraint and responsibility.


On Aug 07 04:31 PM KAIMU BIZ wrote:

Aug 07 05:07 PM

[Rant and Rave:]

"Vikram Pandit has proven himself to be a survivor" ... ???

No!!!

His survival has proven that The Board is corrupt and incompetent.

Aug 07 05:25 PM

[Ricard:]

The American Dream was built on risk. Pioneers who settled in the Wild West braved many dangers and took on many risks without a social safety net. These people were not playing Russian roulette - they were people who wanted better lives for themselves and their children. If this play comes to pass, Citicorp (not Citigroup) will become free of the government (as free as one can expect...in the end, the government owns everything - doomsayers are simply stating the obvious thinking it is some sort of revelation), and will have its shot again building the American Dream. In fact, Citicorp as it stands (if you trust the latest earnings release) is already doing just that.


On Aug 07 04:31 PM KAIMU BIZ wrote:

> Is that what the American Dream is now?

Aug 07 05:53 PM

[KAIMU BIZ:]

ALOHA !!

Ricard - No I equated YOUR trades to Russian Roulette! I prefer to avoid "very wild rides"(your words not mine) ...

I understand your reasoning about how the government(taxpayers)get the toxic losses while CitiCorp gets Smith Barney. You are asking me, a guy who lives in Hawaii on a five acre ocean view farm, who has no inside connections to Geithner or Ben or even Pandit to accept that the toxic assets will be SPUN off by the US government in the "foreseeable future", as you put it.

By insider trading disclosures the guy(Dick Parsons)you say who will bring C into the World of huge profits and who will be making all the key "crucial decisions" is actually loading up on Time Warner(TWX) stock instead of C. In fact one of his last "pure" acquisitions Mr. Parsons only bought 292 shares of C for a total investment value of $382, compared to 155,000 shares of TWX options he exercised. Does he not have any C options to exercise? My questions is why isn't your key insider loading up now if this is such a great trade? Or is he just there for the "freebies"?

You want a risky trade to work and you are begging your readers to buy into it on our dime! Will you inform us all when to sell your "very wild ride" or perhaps which option straddles you may employ later down the line?

My strategy is to trade less risky companies with long term track records of low risk and backed by management that understands risk and seeks to avoid it, not embrace it! C does not cut the mustard in that regard ...

I do wish you good luck in all honesty ... I would much rather see the readers here at SA profit rather than lose.

Maybe you can offer a "C Update" in a few months so the readers can post whether they made money or not.

Good luck ...


On Aug 07 05:07 PM Ricard wrote:

> I originally labeled you emotional because your post had nothing
> to do with the company highlighted in this article. Not because
> you had anything against 'trading', not because someone is handing
> you a loaded gun. Although, if you equate speculation to Russian
> roulette, I suggest you don't do it, for your own emotional well-being.
>
>
> I believe this speculative 'trade' has sound fundamental foundations
> if you discount Citi Holdings as already being this 'government bailed
> out institution' that you seem to equate to 'day trading' and 'moral
> decay'. I am not buying this portion of the company, and if you
> have read my article and understand my reasoning, I hope you can
> at least recognize this part of my argument. I do not think C deserves
> to have a large part in anyone's portfolio, but I am now repeating
> myself.
>
> I am not sure what your agenda is, but if you have a problem with
> the trade, I suggest you keep your arguments at that level. To think
> that I should be writing financial regulatory reform packages is
> not a reasonable expectation.
>
> On Aug 07 03:29 PM KAIMU BIZ wrote:

Aug 07 06:59 PM

[KAIMU BIZ:]

ALOHA !!

No that's not the American Dream, this is ...

This was the original definition of the AMERICAN DREAM that the bankers did not like, since it had nothing to do with DEBT. This is from the book THE EPIC OF AMERICA by James Addams (1931)...

"It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.” END

Sounds more like a repeat of the Declaration of Independence ...

Having the US government change our nappies every time we have a bank crisis brought on by high risk managers is not something I aspire to and nor do I want my tax dollars rewarding such behavior, yet reward we do, time after time!

But ... IT IS WHAT IT IS!

For my Spanish speaking amigos ... ES QUE LO ES!

Going to the beach bruddah!


On Aug 07 05:53 PM Ricard wrote:

> The American Dream was built on risk. Pioneers who settled in the
> Wild West braved many dangers and took on many risks without a social
> safety net. These people were not playing Russian roulette - they
> were people who wanted better lives for themselves and their children.
> If this play comes to pass, Citicorp (not Citigroup) will become
> free of the government (as free as one can expect...in the end, the
> government owns everything - doomsayers are simply stating the obvious
> thinking it is some sort of revelation), and will have its shot again
> building the American Dream. In fact, Citicorp as it stands (if
> you trust the latest earnings release) is already doing just that.
>

Aug 07 07:10 PM

[Ricard:]

You are the master of hyperbole and exaggeration. No one is begging to be heard except for you.

I do not know how many times I need to explain to you that this trade is not meant to be a core position in a portfolio, but does certainly offer a high reward incentive if it were to come to pass. So, I won't tell you again.

I still have no idea what your agenda is, but I politely ask that you take it elsewhere...I do not know what part of your numerous diatribes have anything to do with the positives or negatives of this stock.

Thanks for your update on Parsons's investment habits...that was indeed noteworthy and probably the only thing of merit you've added to this discussion.

On Aug 07 06:59 PM KAIMU BIZ wrote:

Aug 07 08:50 PM

[John Lounsbury:]

Ricard - - -

Well argued perspective. I have taken the other side of the argument. The thought has occurred to me that we both could be right. There are two possibilities that come to mind:

1. If C succeeds in arriving at a reorganization that isolates the balance sheet problems it has, either by selling assets and using the proceeds to write down high risk assets or by having the government to accept the high risk stuff and keep better assets in the publicly traded company (good bank, bad bank solution).

2. Goldilocks returns and we have a booming economy by a year from now, with the real estate bottom well behind us and houses appreciating again, all be it at a more reasonable 3-4% a year. This would reduce the anticipated foreclosure burden in 2010 and 2011 and toxic could become potable.

Of the two possibilities, number 1 is more likely. However, I think still want to take a position opposing you. I do like your option strategy and would take a look at it myself on another dip of C into the $2.50 area.

Aug 07 08:53 PM

[Ricard:]

I equate Citicorp (not Citigroup) to a conservative business with a valid model that may help people achieve their potential. Any valid business model will tend to generate win-win situations for both the customer and the business. Responsible lending is a valid business model, even if you do not think so.

I personally think financial institutions SHARE in the guilt along with YOU AND ME in causing this recent crisis from FWMD, to lack of due diligence by people who should have known better, to homeowners leveraging themselves to the hilt, and to the friends and family that just watched them do it. No one is innocent, including you in your farm on Hawaii. You could have done more, you could have helped your friends, coulda woulda shoulda...let it go. Get on with your life.

I placed certain words in capital letters because you are not taking my perspective as a whole, and I would like for you to focus on arguments that you may have missed, or purposefully left out. I've laid out my reasoning, and do not appreciate when others like yourself take half a sentence and twist it into an argument counter to the one I presented. I am not a politician, and should not have to deal with 'reporters' looking for sound-byte arguments to twist to their own ends. If you do not like what I've presented, then you are free to say so, and move on. If you see any contradictions, by all means POLITELY point them out to the author.

If your point is that debt in general is a poison to the soul, thank you for sharing. Your point is well taken, extreme as it may be, but play time is over, and good night. One more time, please refrain from posting again on this article about Citigroup (not about the moralities of debt or Russian roulette or whatever other topic fancies your mind).


On Aug 07 07:10 PM KAIMU BIZ wrote:

> ALOHA !!
>
> No that's not the American Dream, this is ...
>
> This was the original definition of the AMERICAN DREAM that the bankers
> did not like, since it had nothing to do with DEBT. This is from
> the book THE EPIC OF AMERICA by James Addams (1931)...
>
> "It is not a dream of motor cars and high wages merely, but a dream
> of social order in which each man and each woman shall be able to
> attain to the fullest stature of which they are innately capable,
> and be recognized by others for what they are, regardless of the
> fortuitous circumstances of birth or position.” END

Aug 07 09:28 PM

[Ricard:]

Thanks for your opinion. I would certainly welcome a focused discussion on the matter at hand.

It seems your 1) is also what my article is speculating upon.

2) is a dealer-folds scenario, where everyone wins. It would be the argument that Tack proposed - that C, including Citi Holdings, is actually a healthy company. I find it somewhat difficult to believe given the extent of the intervention, but I certainly would be open to this eventuality as well as far as it working for my position. :)


On Aug 07 08:53 PM John Lounsbury wrote:

> Ricard - - -
>
> Well argued perspective. I have taken the other side of the argument.
> The thought has occurred to me that we both could be right. There
> are two possibilities that come to mind:
>
> 1. If C succeeds in arriving at a reorganization that isolates the
> balance sheet problems it has, either by selling assets and using
> the proceeds to write down high risk assets or by having the government
> to accept the high risk stuff and keep better assets in the publicly
> traded company (good bank, bad bank solution).
>
> 2. Goldilocks returns and we have a booming economy by a year from
> now, with the real estate bottom well behind us and houses appreciating
> again, all be it at a more reasonable 3-4% a year. This would reduce
> the anticipated foreclosure burden in 2010 and 2011 and toxic could
> become potable.
>
> Of the two possibilities, number 1 is more likely. However, I think
> still want to take a position opposing you. I do like your option
> strategy and would take a look at it myself on another dip of C into
> the $2.50 area.

Aug 07 09:38 PM

[Ricard:]

LOL, it seems that Cramer is on to this trade as well:

seekingalpha.com/artic...

I rarely agree with Cramer on anything, which highlights my conservative bent and my tendencies towards buy and hold. However, here Cramer is making a buy and hold call, regarding C as "the ultimate call on economic growth worldwide." I'm not sure if it's a positive to be associated with Cramer, but regardless of my negative opinions about his show, I do consider him to be intelligent.

This is either a sign that I have sold my soul, or that a consensus is building that the negative press is artificially depressing this stock.

Aug 08 02:40 PM

[Anthony Alfidi:]

Citigroup: Priced to FAIL. What's their exposure to commercial mortgages? That's the next big shoe to drop, and woe to anyone close to where it falls.

Aug 09 02:45 AM

[Ricard:]

Quote a dollar figure. I have a quote, and I am not worried:
smarteconomy.typepad.c...
$20 bil is not a large number. If you have one that's larger, I'm all ears.

What I am more worried about are ARM resets and Richard Koo's vision of a 'balance sheet recession'.

On ARM resets, I believe the Fed is on top of this one. I also believe the Fed was on top of the most recent trouble as well, and took the approach of signaling trouble after it occurred so that it would not shoulder the blame for causing the crisis by politicians and the media at large. Such an argument would corroborate the Fed's recent media blitz, allying himself with the common electorate, and scapegoating the problems onto AIG, C, BAC, etc. Economists may know better and blame the Fed, but for Bernanke (and any Fed chief), they have to pander to a different audience. Of course, I may be giving the Fed more credit than it's due, but I do not find it constructive to become a back-seat driver for the Fed.

On the balance sheet recession, I believe our problems are less than that of Japan, although they are certainly significant. I've requested a review copy from SA, and hope to get my own review up in the coming weeks - the thesis does look fascinating.


On Aug 09 02:45 AM Anthony Alfidi wrote:

> Citigroup: Priced to FAIL. What's their exposure to commercial
> mortgages? That's the next big shoe to drop, and woe to anyone close
> to where it falls.

Aug 09 01:16 PM

[Madacasto:]

The next big shoe to drop is the abolishment of overused financial cliches, like "the next big shoe to drop".


On Aug 09 02:45 AM Anthony Alfidi wrote:

> Citigroup: Priced to FAIL. What's their exposure to commercial mortgages?
> That's the next big shoe to drop, and woe to anyone close to where
> it falls.

Aug 12 05:32 PM

[Ricard:]

Update:

Closed my put position today, and sold 25% of my calls to cover the cost.

At this point, I've effectively been granted 'free calls' - the 75% outstanding calls I have have now cost me nothing, allowing me to ride C up with impunity and without risk.

Aug 20 02:11 PM

[Ricard:]

Parsons's current C holdings are over a quarter million dollars:

seekingalpha.com/artic...

Small percentage of his net portfolio, but you can't fault the man for not putting all his eggs in one basket, and this basket is certainly questionable in quality, a point I recognize despite my long position.

Given how execs are compensated nowadays, he'll probably be awarded back-dated options after the government gets out of C.

Aug 21 06:33 PM

[Ricard:]

WSJ's bullish take on C:

online.wsj.com/article...

It argues adequate TCE and 'positive' government intervention.

Aug 24 02:41 AM

[Ricard:]

John Paulson is rumored to have bought a 2% stake in C:

www.reuters.com/articl...

Aug 27 09:49 AM

[Ricard:]

The significance of $5 for C:

blogs.wsj.com/marketbe...

Citigroup - A Government Success Story?:

blogs.wsj.com/marketbe.../

Aug 28 01:30 AM

[Ricard:]

The Motley Fool chimes in with a balanced perspective:

www.fool.com/investing...

I'd like to point out that Citi Holding's proportion of Citigroup just so happens to correlate perfectly with the government's proportion of C stock outstanding.

Aug 30 05:05 PM

[Ricard:]

Insider activity since March has been 100% on the buy side:

www.reuters.com/financ...=

This is just the first page of transactions.


Trading Date Name Title Type Shares Traded Price
16 Aug 2009 THOMPSON WILLIAM S Director Buy 100,000 $4.00
5 Aug 2009 PARSONS RICHARD D Director Buy 13,517 $3.77
5 Aug 2009 PARSONS RICHARD D Director Buy 2,301 $3.78
4 Aug 2009 MCQUADE EUGENE M Officer Buy 1,000,000 $3.41
3 Aug 2009 MEDINA MORA MANUEL Officer Buy 1,000,000 $3.21
23 Jul 2009 PANDIT VIKRAM S Chief Executive Officer Buy 365,384 $0.00
23 Jul 2009 LEACH BRIAN Officer Buy 219,230 $0.00
23 Jul 2009 ARMSTRONG C MICHAEL Director Buy 202,423 $0.00
23 Jul 2009 PANDIT VIKRAM S Chief Executive Officer Buy 365,384 $0.00
23 Jul 2009 DEUTCH JOHN M Director Buy 80,384 $0.00
30 Jun 2009 THOMPSON WILLIAM S Director Buy 37,276 $0.00
30 Jun 2009 O NEILL MICHAEL E Director Buy 37,276 $0.00
30 Jun 2009 SANTOMERO ANTHONY M Director Buy 5,376 $3.49
30 Jun 2009 PARSONS RICHARD D Director Buy 6,451 $3.49
30 Jun 2009 GRUNDHOFER JERRY A Director Buy 37,276 $0.00
30 Jun 2009 THOMPSON WILLIAM S Director Buy 5,376 $3.49
30 Jun 2009 SANTOMERO ANTHONY M Director Buy 37,276 $0.00
30 Jun 2009 O NEILL MICHAEL E Director Buy 5,376 $3.49
30 Jun 2009 BELDA ALAIN J P Director Buy 6,451 $3.49
31 Mar 2009 BELDA ALAIN J P Director Buy 269 $1.31
31 Mar 2009 LIVERIS ANDREW N Director Buy 29 $1.31
31 Mar 2009 DERR KENNETH T Director Buy 331 $1.31
31 Mar 2009 DEUTCH JOHN M Director Buy 292 $1.31
31 Mar 2009 RODIN JUDITH Director Buy 269 $1.31
31 Mar 2009 PARSONS RICHARD D Director Buy 17,189 $1.31

Aug 30 05:14 PM

[Ricard:]

Sold off my remaining C calls. Bloomberg and the WSJ have reported a possible government sale not involving Citi Holdings. Obviously some people knew about this rumor before others, since C has dropped from $5.20 to its current $4.20.

So, the government will attempt to publicly dump its 7 billion shares, and at the same time require that C raise more capital to offset. Gee...can you spell dilution...? Not to mention, eliminating the possibility of the govt absorbing Citi Holdings with its common equity.

Sep 15 12:57 PM

[Ricard:]

The plan now is to see whether or not there will be another entry point into C < $3. Then, depending on other circumstances, maybe do the same LEAP play again with puts and calls.

Sep 15 01:01 PM

[Ricard:]

May as well attempt to profit while waiting...

Bought C $2.50 puts exp Jan 2010 for 11 cents a share in expectation that the government's selling will severely depress this stock back to my original buy price.

Sep 15 01:28 PM

[Ricard:]

An update on C - 3Q looks iffy at best. Citicorp is not as strong as it can be. It looks like the government's playbook is to treat the entirety of Citigroup as an RTC-style institution.

online.wsj.com/article...

Oct 15 11:11 PM