Citigroup: A Simple Analysis of a Terribly Complex Company

In this post I will attempt to determine a value for Citigroup (C) based on sound reasoning and basic investing principles.

It should be noted that analyzing Citigroup is something of an oxymoron. This is because the financial statements that I use to determine value may be unreliable. As of November 15 2007, the Financial Accounting Standards Board updated their wording of Fair Value (FAS 157) to essentially allow for mark-to-model valuations. Mark to Model allows a company to estimate the selling price of their assets if a market existed. Prior to this update, fair value was measured by the actual price that the assets would sell for now.

It’s not hard to see how “assuming we lived in the future” could result in higher prices. This affected financial assets linked to the price of real estate most since the housing market crashed from 2006 to present. Nevertheless, Citigroup is allowed to value these assets as if a market existed. In other words, they get to assume that prices will return to pre crash levels (or close to them), and value the assets in that scenario as a “fair value”. Furthermore, they have many assets for which defaults are increasing and highly probable in this environment. A number of these losses are being extended into the future as a result of efforts by government and Citigroup to “keep homeowners from foreclosing”. Some of these efforts will be successful and individuals will be able to pay back Citigroup and stay in their houses / pay off their loans. For others, and I expect this to represent a significant portion, they will lose their house, or re-default on their loans, and Citigroup will then see a write-down in their assets. Those are the 2 main risks associated with analyzing Citigroup’s asset levels and they are very real risks.

Now with that out of the way, let’s take a look at Citigroup’s asset values. I’ve gathered common stock equity and net income of Citigroup in the past 10 years from their financial statements. I’ve also used Yahoo Finance to provide the daily closing price of Citigroup’s common stock in the past 10 years. I use unadjusted actual closing price because looking at adjusted price does not include the value of the dividend. I average daily prices each year, multiply the annual average by the weighted average shares outstanding each year to arrive at an annual average market value for the company. (Stock splits [August 2000] have been accounted for.) Below is a chart of my results.

Year	Average Annual Diluted Market Cap	Net Income	Common Equity
2008	106,166.24	-27,684.00	70,966
2007	215,614.77	3,617.00	113,447
2006	216,290.02	21,538.00	118,632
2005	217,387.83	24,589.00	111,261
2004	231,891.48	17,046.00	108,015
2003	204,324.87	17,853.00	96,889
2002	192,566.88	15,276.00	85,318
2001	235,571.55	14,126.00	79,722
2000	230,321.86	13,519.00	64,461
Average	205,570.61	11,097.78
All Values in USD Millions

I was originally planning on analyzing Citigroup based on Market Value to Common Book Value and Market Value to Net Income since 2000. However, the average MV/Common Equity is 2.00. Given that current equity is expected to be $138 billion, that would suggest a market value of $276. I believe it is highly unlikely that in the worst recession, Citigroup could somehow sell for above its average in the past 10 years. Further the MV/NI ratio provides unusual results as well since Citigroup is estimated to earn -0.13, 0.09 and 0.29 in the next 3 years. They are expected to be far too unprofitable to measure by the MV/NI multiple.

However, the above chart does show that Citigroup’s common share market value has average approximately $200 billion in the past 10 years. In other words, in the past 10 years, equity holders have consistently valued Citigroup at about $200 billion.

On September 3rd 2009, Citigroup shareholders approved an additional shares issue. Actually the June 30^th report along with the exchange of shares in July, mentioned that this new issue would be essentially guaranteed. The July share exchange was based on the premise that individuals who got that exchange would vote in favour of today’s exchange. Therefore the value should have been priced in then.

According to CNNmoney, 22.88 billion shares of common will exist afterwards along with an increase in common book equity of $60 billion. Therefore, common equity can be estimated as 60 + 78 = 138 billion. With 22.88 billion shares, this would suggest that each share is worth $6.03.

Let’s attempt to assign an amount of equity that could be written off if asset values decline. On January 15^th 2009, Citigroup entered a loss sharing agreement with the US Treasury and FDIC. The agreement was on a pool of assets worth $301 billion. Under the agreement, Citigroup would absorb the first $39.5 billion and 10% of the remainder that is lost. As of June 30^th 2009, the pool of assets was down to $266.4 billion with $5.3 billion losses to date. Therefore assuming the entire remainder is completely lost, Citigroup would absorb the next $34.2 billion leaving $232.2 billion to be absorbed at 10%. The total amount lost would be $57.42 billion in the worst case scenario.

Under the worst case scenario Citigroup common book equity would be worth $80.58 billion. This translates to a price of $3.52. In a worst case scenario Citigroup is worth $3.52.

Now for the better news. I say better because it isn’t all that great. The better news is that in the past 10 years Citigroup has been priced at an average market value of about $200 billion. If we use that as the basis for the $57.42 billion equity write-down, then the value of Citigroup is $142.58 billion. This translates into a price of $6.23 per share.

I think this represents a fair value for Citigroup without accounting for further losses. As long as we monitor Citigroup and ensure that they are not on pace to write down more than $57.42 billion, $6.23 per share is not an unreasonable estimate for value. It is fairly close to their stated common book value of $6.03 per share as a secondary measure, and close to Bank of America's (BAC) current market value of $145 billion as a comparative measure.

Here are the main caveats to my simplified analysis.

Low Profitability

Analysts estimate Citigroup will earn -0.13, 0.09 and 0.29 for 2009, 2010 and 2011 respectively. This means they expect low profitability in the next 3 years. In years of low profitability it is not unusual for a company to be valued by its assets. However in the long run you expect the company to grow through their income. Unless Citigroup earns 10-15 billion in 2012 or 2013, the price/earnings multiple would suggest it is overvalued. At $6.03, the market value of Citigroup is $138 billion. P/E from 2002-2006 has averaged 11-13 suggesting earnings of 10 billion + are required to support a price of $6.03 per share.

Asset Declines

I think using a 1.0 x NAV multiple is a fair value. I also think taking its average value in the past 10 years, and subtracting $57.42 billion is also fair. However in many ways I can see $57.42 billion being too conservative. Further, I haven’t considered that the much of the NAV I use – $38 billion to be exact – is made up of intangibles. Discounting the intangibles drops the value of Citigroup significantly.

Conclusion

Due to the risk associated with Citigroup I don’t think it is a good buy. I do however think that it is undervalued largely because it is remains less than common book value. If I held Citi now, I would recommend to continue holding it since it should still appreciate in value. I would wait until next quarter results became more conclusive of how much asset values are declining and re-evaluate at that point. If Citi were to return to a market value of $200 billion, its per share value would be $8.74. Therefore the upside is relatively limited when considering the risk.

Overall, hold Citi if you currently have it, but don't buy it if you don't have it. There are likely much better and cheaper companies to buy in this environment

Disclosure: No Positions but I did recommend Citigroup to family at 4, 4.6, and 5.23.

Comments

[Ricard:]

I think the author's point is that at these prices ($5), there's no real compelling reason to act one way or another. If you have cash, there are better entry points for C, and if you already hold the stock, probably better exit points in the future. Given the volatility of C, there are more certain one-directional prospects in other stocks. Many times the best decision after doing due diligence is to do nothing.

To the author - Interesting analysis of C's book. I've found it next to impossible to derive any useful information from a bank's book, so good on you for trying. Myself, I've taken the approach that anyone buying C is buying Citicorp, not Citi Holdings (which I believe will eventually become a government entity). Citicorp w/o the government shares earned $3 bil Q2, annualized with a P/E of 10, would give Citicorp a $120 bil market cap, 15 bil shares (no govt shares) makes it $8 a share. It's total speculation on my part, but I got in pretty early ($2.50 with LEAP calls) - so far so good.

Still, at $5, it's approaching at least the author's assessment of fair value. For a stock with this kind of risk profile, a 20% return is not enough to tempt me to buy at this time.


On Sep 04 02:54 PM johnsond wrote:

> Why would a recommendation change if a person has a stock or not?
> It should be totally irrelevant. If I have $1,000 to invest where
> should I put it? If that answer is not Citi, than if I have $1,000
> in Citi shouldn't I sell Citi and put it in the same as I had the
> cash.

Sep 05 10:57 AM

[stonebluff:]

Beware of assuming that mark to market should be a mantra. When the Fed racked interest rates up to 20% in the early 80's, probably every commercial bank in the US was broke bcause of depreciation in its assets. A bank of which I was a director was under water because of depreciation in its impeccable loan portfolio alone.. The regulators and bankers very sensibly ignored the mess. They have to have that flexibility.

An analysis of book value that is made based on intangibles based on what every credit trainee is taught not to do.

Sep 05 11:38 AM

[Yurasis_Dragon:]

To Bruce Krasting:
You wrote "I think we entered a 'new world' sometime in 2008'.

Nice understatement!
It's more like the US Government followed Alice down the rabbit hole.


On Sep 05 08:19 AM Bruce Krasting wrote:

> Interesting analysis. I would take issue with your approach. I think
> we entered a 'new world' sometime in 2008. Everything we thought
> about re bank earnings and ratios has gone out the window.
>
> Looking at how the market valued C eight or ten years ago has little
> value as a predictor of the future for me.

Sep 05 11:43 AM

[Crookedwood:]

The limited upside to the stock over the next three years is a negative. If true then expect no change on the dividend front and it may be time for those who whole C to sell. However, looking beyond three years/five years C is a buy for those who seek a contrarian position.

Sep 05 11:52 AM

[The-Stock-M...:]

At the time of writing, C is probably a 'woodo stock' at best. Even attempting to perform a valuation maybe a bit out of place because of the mark to market accounting rule change earlier in 2009. Much of the bad assets may not be marked at all, so it may not be fair to run a valuation on the stock. Folks that are buying C today are buying on the basis of what it was before. Maybe the stock will see 10's, 20's or even 30's or more. The risk is minimal that it will go bankrupt. Unlike a GM or Chrysler, a large financial institution like Citi going BK would be a rare possibility. That factor itself should give C a good valuation IMHO.

Sep 05 01:07 PM

[E Nuff Sed:]

The main allure of Citi is that the book value in more than being ascribed to by the market. Book Value of citi is around $25 - so it is selling a 1/5th of book.
Good chance that the stock may double over the next 3 years.

Sep 05 01:32 PM

[Streetwalker:]

Nice try, but I think the methodology used is flawed in several ways:

1. Though the common shares of Citigroup is now not created equal because the government has stepped in, the market just does not care about this and will treat them equally. All the shares should have the same market value, and market does not care who will absorb the losses , and by how much. That being said, the common equity value calculated, which is to be used to get share price, should not only have had the losses taken out which have been absorbed or are to be possibly absorbed by Citigroup - of course, this should be no problem if the first $39.5 billion loss would also be the last loss, but this is very unlikely given current market conditions. And the shares you used I think are total shares, not shares owned by shareholders as opposed to government.

2. In your worst case scenario, the total asset pool can't be used to get the maximum loss that Citigoup will be capaple of absorbing, because normally debt holders will not participate in the process of writing down assets.

Still, I appreciated the great enthusiasm and curiosity about stock market shown by you as a new grad. Hope to meet you often here.

Sep 05 01:43 PM

[farmer448:]

I wou8ldn't touch Citicorp with a ten foot pole. It has some of the worst customer service in a business where the customer makes or breaks.

I learned a long time ago you do better in well managed companies. In this banking environment it is very important to look at the management and how customers are treated. Big should not be looked at as better.

Your analysis is exactly what I would expect from a by the numbers fellow. However, their are banks that are better managed, with better numbers that will probably produce superior returns once the over-leveraged assets are worked out. Citicorp is a zombie hoping for a second life

Sep 05 03:14 PM

[St Alphonso:]

I don't know finance, but I know programming, and bigger gets more complex exponentially. There is no way to efficiently run something as large and complex as Citi, so it will be an even more colossal collapse when it finally is deemed 'Too big to Succeed'.

if(citi>huge_bank)
fnDisaster();
void fnDisaster();
{
while(US=solvent);
{
fnFeedBottomlessPit($b...
}
}

Sep 05 03:39 PM

[Tack:]

You have hit the nail on the head, one that has eluded so many observers, misled by the ridiculous mark-to-market values, which, of course, are near meaningless for bank loan portfolios that are being held for performance, not as speculative-gain assets. The current mark-to-market values, so frequently cited by the "insolvent" crowd, bear almost no resemblance to the discounted-cashflow values typically used banks and other financial firms to value debt portfolio assets.

The above explains why banks are making record cashflows and amassing record cash balances -- lots of that "valueless," "toxic" debt is actually performing nicely and throwing off cashflows, month after month. It, also, explains why no bank is in the slighest interested to jettison absurdly-marked loans at giveaway prices, so that some drooling speculators can make all the gains on the writeups after the hysteria passes (it's passing, now, by the way).

Huge lobbying efforts were expended by the speculator class to inspire Congress to pass laws making it mandatory for banks to sell their assets at ruinous prices, but, thankfully, these efforts have failed, so far (and let's hope, forever). If this had occurred, we would have seen the complete ruination of the banking system and utter destruction of the economy, with an accompanying depression of incalculable magnitude.

Related to the foregoing, the same speculator class caused most of this crisis by taking what could have been a manageable subprime-loan problem and turning into an economic rout by playing a rigged game of shorting (much of it illegal naked shorting) debt indices, while at the same time buying huge CDS positions on the institutions holding the debts, know full well that the then-current mark-to-market rules would ensure financial catastrophy for the banks and other lenders.

So many observers/commenters seem to think that the writedown, selloff, paper-insolvency stage was/is the real world and that the current recovery is false, but they have it exactly backwards. The banks, mistakes though they made with poor loans (aided and abetted by Barney Frank/Christopher Dodd lending mandates), have been the victims of a scurrilous campaign of manipulation and profiteering. It is only now that they are regaining some semblance of normal operation, and even now, they have a long way to go to regain full economic and stock-market value.


On Sep 05 11:38 AM stonebluff wrote:

> Beware of assuming that mark to market should be a mantra. When the
> Fed racked interest rates up to 20% in the early 80's, probably every
> commercial bank in the US was broke bcause of depreciation in its
> assets. A bank of which I was a director was under water because
> of depreciation in its impeccable loan portfolio alone.. The regulators
> and bankers very sensibly ignored the mess. They have to have that
> flexibility.
>
> An analysis of book value that is made based on intangibles based
> on what every credit trainee is taught not to do.

Sep 05 07:26 PM

[If Then:]

there is a big hole in your analysis:

Citi has 600 bn loans on their balance sheet. The loss sharing agreement only works on 300bn of the asset. I don't know the exact criteria of the asset to be covered, but one can infer that the existence of qualification of the asset to be covered by the USG and FED means that they cannot be the worst assets on Citi's book. Assuming the 300 bn loans that are excluded by the loss sharing agreement are likely to be those that will bring the most writedown for citi, then your worst scenario assumption is totally wrong.

Sep 06 04:21 AM

[Dialectical...:]

Tack,
This is an interesting analysis.
In your opinion was the short selling "take-down" part of a coordinated strategy to cause financial collapse or was this just an unfortunate side effect of their aggressive investment strategy? In other words, were the short sellers just doing what they did to make a buck or did they understand the risk that the whole system might collapse?


On Sep 05 07:26 PM Tack wrote:
>
> Related to the foregoing, the same speculator class caused most of
> this crisis by taking what could have been a manageable subprime-loan
> problem and turning into an economic rout by playing a rigged game
> of shorting (much of it illegal naked shorting) debt indices, while
> at the same time buying huge CDS positions on the institutions holding
> the debts, know full well that the then-current mark-to-market rules
> would ensure financial catastrophy for the banks and other lenders.
>
>
> So many observers/commenters seem to think that the writedown, selloff,
> paper-insolvency stage was/is the real world and that the current
> recovery is false, but they have it exactly backwards. The banks,
> mistakes though they made with poor loans (aided and abetted by Barney
> Frank/Christopher Dodd lending mandates), have been the victims of
> a scurrilous campaign of manipulation and profiteering. It is only
> now that they are regaining some semblance of normal operation, and
> even now, they have a long way to go to regain full economic and
> stock-market value.

Sep 06 10:09 AM

[Terence Chow:]

Wow! Thanks for all the insightful comments. I’m glad I spurred up so much dialogue so quickly. There are a few common issues brought up and a few comments which I didn’t understand. I will attempt to address these issues but in some topics I will concede that I have no solution for them. This may get fairly long winded as there were so many comments...

The issues that were brought up are:
1) Bad Asset Values
2) Bankruptcy / Bailout makes Citigroup worthless
3) Things have changed in the banking industry. Ratios are different post 2008
4) Mark to Market is not a reliable method since times of extreme environments result in absurd values
5) Further Dilution
6) Things I did not address

1) Bad Asset Values

From what I gather, this is arguably the most important issue regarding an analysis of Citigroup. I agree completely that these asset values are unreliable and inaccurate. However to what degree they are inaccurate I am not sure. I’ll make another post with a detailed look at asset values and see if I can come up with anything remotely realistic about their current value. Stay tuned…

2) Bankruptcy / Bailout make Citigroup worthless

I think that because of bailouts, a lot of people automatically assume the worst in Citigroup. I think emotions get in the way of a fair analysis. I look at Donald Trump and see his many financial problems in the 1990s and then look further and see the empire that he has built today. Citigroup still has a gigantic network of relationships and without looking at it in detail you could be potentially missing out on a great investment opportunity. As my above analysis has shown - however flawed - in this case, that may not be true. Bottom line: Don’t use “Citigroup would be worthless if they didn’t get bailed out.” as an argument of their lack of value. The bailout has happened and we should analyze their current situation not what has happened in the past.

3) Things have changed in the banking industry. Ratios are different post 2008

I have to agree that things have changed, but I don’t believe they changed that much. If anything price multiples may be discounted from historic levels because of risk, but overall, they are still useful as a general estimation of value. My use of Citi’s value 8-10 years ago represents to me, a baseline resilience of what Citi’s network of business has been for 8 – 10 years. This may be a flaw in my analysis to look at the value of something for the past 10 years and make the assumption that this average value represents what Citi would be now if they had no bad assets. This would be true if the past 10 years has been biased and that the future will be significantly different. I have taken this thought into consideration. Thanks.

Bottom line: For the banking industry, are the past 10 years significantly different from the future? If so, then looking at the past is flawed. If not, then looking at the past can assist in illustrating the value of the company and where it is headed.

4) Mark to Market is not a reliable method since times of extreme environments result in absurd values

Stonebluff’s point is very wise. Mark to market does not always work during extreme environments. I have to say that however, in Citigroup’s case, the mark to market is not damaging Citigroup as much. I think the majority of problems with Citigroup are non performing loans and future delinquencies. Considering Q2 report says Citi valued their Citi Holdings residential related securities with the assumption that housing prices lose 32.3%, I think this assumption is correct. This conclusion is based on the fact that the stock market is now about 33% from its high and is arguably more or less fairly valued. That may be a terrible proxy, but I do note that the Case Shiller Home Price index rose for the 2nd consecutive month in the 20 metropolitan composite. Lower interest rates have likely helped Citigroup by inflating their assets as their CDO, CMO etc are calculated by discounted cash flow.
Overall, in my opinion, mark to market is not discounting the value of their assets because 1) interest rates are lower and 2) housing prices may be fairly valued. Knowing that their asset values are fairly valued for 2 assumptions, the next step is to determine delinquency rates and apply an allowance on their assets to see the net value. It would likely be useful to assume some long term price of housing as well and inflate asset values according to this long term housing price. The combined effect will give one estimate of fair value.

Bottom line: fair value accounting changes that allowed for mark to model have arguably had a limited effect on Citigroup’s bad assets. This is because they are valuing their houses 32.3% from their high, consistent with stocks and consistent with the most recent 2 month rise in the Case Shiller Home price index. More importantly calculate an allowance for future defaults and use this to find a net fair value for loans.

5) Further Dilution
I can say that I believe the potential for further dilution is extremely limited. Taking into account the September 3 shareholder approval of the exchange, and taking into account the effect of adding all off balance sheet items back on the balance sheet (as discussed in Q2 report), the tangible capital ratios and total capital ratios would be 10.36% and 14.26% respectively. Q2 also illustrates sensitivity analysis for our purposes and notes that 1 billion in risk weighted assets affects the ratios by 1.3 and 1.7 basis points respectively. Therefore to breach the minimum requirements of 6 and 10% would require 335.38 billion 250.58 billion of risk weighted assets to be lost respectively. Further dilution is thus not a concern since we can monitor this each quarter and then subsequently react. (Note they are risk weighted assets so it may represent much more than the stated amount. For comparison, the 266.4 billion asset pool is only risk weighted at 20% and would only represent a loss .7 and .9 % of the ratios respectively.) Finally regarding the G20 further capital requirements that some may bring up, we have to consider that it may be farther in the future than you think. Discussion + Drafting + Legalizing + Setting up Enforcement / Monitoring may take a year if not many and we can monitor to see if this probability becomes more realistic.

6) Other
I have taken into consideration the idea of removing intangibles and to analyze Citicorp on its own. Thanks for these points. If_Then thanks for that point as well I’m gonna rework my analysis.
Regarding Streetwalker’s comment, I did not understand why I would exclude the government’s shares in the calculation of total shares. Can anyone elaborate? Regarding his comment about debt holder’s not participating in asset write-downs, I write-down assets through a loss in equity. Debt holder’s don’t participate in that so I also don’t understand his 2nd point. Can anyone elaborate on that as well? Thanks.

I have to say that analyzing Citigroup feels like a waste of time because it seems like the company is not worth an investment and it is so complex that the value you arrive at may be completely wrong. However I can say that it is enjoyable waste of time because coming up with a fair value of the company is quite tough and interesting. The discussion that has followed has proven quite useful and shown some direction for a follow up analysis. Thanks for all the comments!

Sep 06 12:41 PM

[Dopamine:]

I own Citi, Im in for the long haul, thanks for the advice, Im expecting a bumpy ride, the chance of a crash is always possible, but....what a fun bet she is right now. Buy it, and dont read another word about Citi for 2yrs....it will survive and do well, in Asia Citi has a strong following, in Indonesia that is all you see.....Citi .....the brand is strong, the media is wrong.

Sep 06 05:09 PM

[Tack:]

Just my opinion, of course, but I think the powertraders on Wall Street look for weaknesses to exploit in the name of profit, without regard to economic consequences, political motives, nationalistic allegiances and/or world conspiracies. To them, Wall Street is just a Golden Goose that keeps producing.

In the instance at hand, it became apparent that if mark-to-market accounting of large asset bases could be linked, more or less directly, to the ability to decimate the market value of thinly-traded debt assets, then, the balance sheets of huge institutions and their related share prices could be brought into play. Hence, we saw the ABX index created by Goldman Sachs for the specific purpose of having a vehicle to short subprime debt paper. As must have been the traders' fondest hopes, the ABX, and other debt indices, became the de-facto standard for valuing corporate debt on a broad basis, so that these thinly-traded indices could serve as the value benchmark for vast quantities of debt assets, without regard to other performance and valuation methods. Once, that occurred, the rout was on, and it was totally self-reinforcing, as declining index values lowered debt-asset values, causing huge writedowns on corporate books, creating panic share selloffs, which in turn created more fear, allowing the indices to be shorted even lower, rather easily.

You raise the question of whether these factions desired or were indifferent to the final destruction of the financial system, and I'd probably conjecture that while they don't mind making the Golden Goose very ill, they don't really want to kill it, since they can make money making it healthy once again, until the next time they want to strangle it for a while.

To that end, once all the damage was done shorting things to near calamity, the same interests that had made tens or hundreds of billions probably hoped to pick up all the decimated paper for a song, if banks could be forced to sell it at vastly depressed prices. That's why so much pressure has been brought to bear on forcing banks to give away 'toxic" paper. However, seeing that this approach was not bearing fruit, and looked increasingly likely not to occur, the speculators did the next best thing, they started buying large positions in the entities holding such paper, so they could participate in the inevitable ride up.

"If you can't beat 'em. join 'em."



On Sep 06 10:09 AM Dialectical Materialist wrote:

> Tack,
> This is an interesting analysis.
> In your opinion was the short selling "take-down" part of a coordinated
> strategy to cause financial collapse or was this just an unfortunate
> side effect of their aggressive investment strategy? In other words,
> were the short sellers just doing what they did to make a buck or
> did they understand the risk that the whole system might collapse?
>

Sep 06 09:18 PM

[Ricard:]

"Regarding Streetwalker’s comment, I did not understand why I would exclude the government’s shares in the calculation of total shares. Can anyone elaborate?"

He may be responding to my arguments. I exclude government shares because I am speculating that the government will use its minority interest to buy out Citi Holdings and turn it into a RTC-style institution:

seekingalpha.com/artic...

In that sense, I have also excluded the losses that Citi Holdings incurred Q2, along with the Smith Barney transaction. C has gone to great lengths to publicize this separation in their Q2 reporting, and I believe it is due to this scenario eventually bearing fruit.


"Regarding his [streetwalker's] comment about debt holder’s not participating in asset write-downs, I write-down assets through a loss in equity. Debt holder’s don’t participate in that so I also don’t understand his 2nd point. Can anyone elaborate on that as well? Thanks."

You guys are in agreement here. Re-read his comments:

"2. In your worst case scenario, the total asset pool can't be used to get the maximum loss that Citigoup will be capaple of absorbing, because normally debt holders will not participate in the process of writing down assets. "

Sep 07 12:09 AM

[Dialectical...:]

Tack... Very illuminating. Thanks for taking the time to explain. Your analysis makes as much or more sense than most things I have read about this financial meltdown.

The issues I am now struggling with have to do with whether (1) the damage to the economy has been so severe that side-effects of these events will have their own set of negative implications (e.g. the prime mortgage default rate increasing due to unemployment has nothing to do with the root causes of the crisis but are merely an after effect of the downturn) and (2) whether the ones riding the banks back up will collectively see potential in another short selling attack (which is to say that even without mark to market, another wave of bad news in home and commercial mortgages while the credit situation is still in a funk leaves banks vulnerable). Do you know of any evidence that short selling has moved in any concerted way to banks which are not 2b2f and may be vulnerable to massive action?

It is hard to talk about mass action without sounding like a conspiracy theorist (which I surely am not), but the reality is that major movements do occur even if they are not necessarily planned in advance in a war room.

This is a very interesting time to be alive.

On Sep 06 09:18 PM Tack wrote:

> Just my opinion, of course, but I think the powertraders on Wall
> Street look for weaknesses to exploit in the name of profit, without
> regard to economic consequences, political motives, nationalistic
> allegiances and/or world conspiracies. To them, Wall Street is just
> a Golden Goose that keeps producing.
>
> In the instance at hand, it became apparent that if mark-to-market
> accounting of large asset bases could be linked, more or less directly,
> to the ability to decimate the market value of thinly-traded debt
> assets, then, the balance sheets of huge institutions and their related
> share prices could be brought into play. Hence, we saw the ABX index
> created by Goldman Sachs for the specific purpose of having a vehicle
> to short subprime debt paper. As must have been the traders' fondest
> hopes, the ABX, and other debt indices, became the de-facto standard
> for valuing corporate debt on a broad basis, so that these thinly-traded
> indices could serve as the value benchmark for vast quantities of
> debt assets, without regard to other performance and valuation methods.
> Once, that occurred, the rout was on, and it was totally self-reinforcing,
> as declining index values lowered debt-asset values, causing huge
> writedowns on corporate books, creating panic share selloffs, which
> in turn created more fear, allowing the indices to be shorted even
> lower, rather easily.
>
> You raise the question of whether these factions desired or were
> indifferent to the final destruction of the financial system, and
> I'd probably conjecture that while they don't mind making the Golden
> Goose very ill, they don't really want to kill it, since they can
> make money making it healthy once again, until the next time they
> want to strangle it for a while.
>
> To that end, once all the damage was done shorting things to near
> calamity, the same interests that had made tens or hundreds of billions
> probably hoped to pick up all the decimated paper for a song, if
> banks could be forced to sell it at vastly depressed prices. That's
> why so much pressure has been brought to bear on forcing banks to
> give away 'toxic" paper. However, seeing that this approach was
> not bearing fruit, and looked increasingly likely not to occur, the
> speculators did the next best thing, they started buying large positions
> in the entities holding such paper, so they could participate in
> the inevitable ride up.
>
> "If you can't beat 'em. join 'em."
>

Sep 07 03:04 AM

[acttang:]

Two things:

1) Citi has sold lots of its assets, so the myterious $200b market cap is less relavent now.

2) If you truely believe that Citi is going no where, don't jsut say crap like "if you have it then hold on, but if you don't have it don't buy." Say "sell options on it."

Sep 07 03:47 AM

[Geezer Bela...:]

Dialectical,
You should ponder the words of Sherlock Holmes on detection that when you eliminated all the facts that are not relevent (and double-checked the ones that are) what remains is the truth, no matter how unlikely.

The Media has conditioned people to shun uttering certain concepts and back off when certain labels are used against them. Political correctness, the invention of Joseph Stalin, inhibits clear thinking and seeing what is plain because people fear what they migh be labelled. "Racist" is one label we are conditioned to shun and "conspiracy theory" is another. Consequently, political and financial conspirators are safe to ply their dirty deeds in the United States.

It used to be known as the "October surprise," the Media firestorm that Democrats would unleash to win elections in November. In 2000, it was the DWI arrest of Bush that almost cost him the election. In 2006, it was bashing a gay Republican Congressman (Foley) , but in 2008 things got really serious. Oil prices were more than doubled even though there was no shortage of oil. This caused the economy to slow and unemployement edged up. The October surprise came early, on Sep 15, when the 'mark to market' rule was instituted. Money was frozen in the banks and the GDP did an instant dive. I reproduced on my blog the graphs from the St Louis FED that shows how money flow fell sharply along with the GDP. Almost instantaneously. This is predictable from the basic equation that describes the economy, so the FED knew what it was doing. And what it was doing was to create an economic tsunami that swept Republicans out of office and help elect a far Left radical for President.

Wew have had apologists for the Conspiracy telling us that the recession began in 2007. Look at the GDP figures and you can see that they turned negative in Q3 and Q4 of 2008, AFTER the invoking of the 'mark to market' rule. The drop was very sharp. Look at the facts and shake off the conditioning.

Sep 07 08:10 AM

[Dialectical...:]

Geezer,
Conspiracies do exist, no doubt. But much of what happens in the world is not the result of a plan but rather a confluence of events spurred by competing agendas and opposing inclinations. So I am hesitant to ascribe conspiracies where there is no hard evidence and little compelling motive. Corresponding events are not evidence of conspiracy.

My problem with the theory you describe (which may be accurate, so don't think I am saying you are wrong) is that I can see no reason the Fed would want sweep a "far left radical" into the Presidency. Can you shed any light on the thinking here?


On Sep 07 08:10 AM Geezer Bela in Exile wrote:

> Dialectical,
>
> The Media has conditioned people to shun uttering certain concepts
> and back off when certain labels are used against them. Political
> correctness, the invention of Joseph Stalin, inhibits clear thinking
> and seeing what is plain because people fear what they migh be labelled.
> "Racist" is one label we are conditioned to shun and "conspiracy
> theory" is another. Consequently, political and financial conspirators
> are safe to ply their dirty deeds in the United States.
> [...]
> in 2008 things got really serious. Oil prices were more than doubled
> even though there was no shortage of oil. This caused the economy
> to slow and unemployement edged up. The October surprise came early,
> on Sep 15, when the 'mark to market' rule was instituted. Money was
> frozen in the banks and the GDP did an instant dive. I reproduced
> on my blog the graphs from the St Louis FED that shows how money
> flow fell sharply along with the GDP. Almost instantaneously. This
> is predictable from the basic equation that describes the economy,
> so the FED knew what it was doing. And what it was doing was to create
> an economic tsunami that swept Republicans out of office and help
> elect a far Left radical for President.
>
> Wew have had apologists for the Conspiracy telling us that the recession
> began in 2007. Look at the GDP figures and you can see that they
> turned negative in Q3 and Q4 of 2008, AFTER the invoking of the 'mark
> to market' rule. The drop was very sharp. Look at the facts and shake
> off the conditioning.

Sep 07 12:49 PM