zalo

Five Reasons Citi's Worth the Long Risk

Its true that Citi has a great franchise, distrubution channels, worldwide reach, top quality professionals. But all that has no value without the blood of any bank, which is capital, and the market price of the stock says that citi has not got much left. The problem is that nobody knows how much further losses they will suffer as the economy deteriorates. AIG had also the same pros as Citi (franchise, distribution, etc) and look were the stock is now. That can be Citi´s fate as well.

Thinking the Impossible: Could Bank of America Go to Zero?

which means that the company accounting equity in reality is undervalued....


On Jan 29 02:05 AM zalo wrote:

> The first BIG issue to define is what is a "toxic" asset. A toxic
> asset is an asset whose expected losses makes its today´s market
> value severely below its book value in a specific institution. This
> has two important parts. First, that the value depends on EXPECTED
> losses, not realized losses. And second, that it depends on when
> and how it is being booked.
> So, a toxic asset depends on expectations and where it is sitting.
>
>
> So, saying that banks are insolvent is quite inexact because people
> are measuring balance sheets with EXPECTED losses and not realized
> losses. This is a massive accounting inconsistency. If you should
> account for EXPECTED losses, you should account also for EXPECTED
> income. If so, banks then should NPV their fees and financial margin
> and put that as equity. Some sort of similar value is generated when
> a company acquires another, mostly known as goodwill, which is the
> value of the ongoing company vs the assets and liabilities in the
> balance sheet of the acquired entity. Unfortunately, goodwill is
> not internally generated due to accounting rules.
> So, writing off expected losses should be done only if you could
> write up expected income. But that doesn´t happen.
>

Thinking the Impossible: Could Bank of America Go to Zero?

The first BIG issue to define is what is a "toxic" asset. A toxic asset is an asset whose expected losses makes its today´s market value severely below its book value in a specific institution. This has two important parts. First, that the value depends on EXPECTED losses, not realized losses. And second, that it depends on when and how it is being booked.
So, a toxic asset depends on expectations and where it is sitting.

So, saying that banks are insolvent is quite inexact because people are measuring balance sheets with EXPECTED losses and not realized losses. This is a massive accounting inconsistency. If you should account for EXPECTED losses, you should account also for EXPECTED income. If so, banks then should NPV their fees and financial margin and put that as equity. Some sort of similar value is generated when a company acquires another, mostly known as goodwill, which is the value of the ongoing company vs the assets and liabilities in the balance sheet of the acquired entity. Unfortunately, goodwill is not internally generated due to accounting rules.
So, writing off expected losses should be done only if you could write up expected income. But that doesn´t happen.

Banks: The Final Countdown?

What is a bad security? subprime MBS? prime MBS? commercial MBS? corporate debt? high yield? consumer loans? student loans? car loans?...

and if banks are cleaned from this securities...is the US government going to clean also the insurance companies, the pension funds, the hedge funds, etc. to stabilize this securities markets?.

The End of Citigroup

I think that saying that the business model is causing citi to implode is incorrect. Why? Because banks (Countrywide, Wahington Mutual), brokers (Bear Stearns, Lehman), wealth managers (UBS, etc) have very different approachs, technologies, philosophies and leaderships and they are also under. So, Citi is not suffering because of its business model, its suffering due to the financial crisis. Some weeks ago, when Morgan Stanley was in the edge, some were speaking that actually the supermarket approach provided stability to banks and that is why MS and Goldman turned to bank holding companies.
One thing is to have a business model that can keep the stock from outperforming and another is saying that it is the cause of an implotion. There is a huge difference in both analysis.

Citigroup: The End Draws Near

Saying that Citi will go through the same road as Lehman or AIG is totally incorrect. Citi has a HUGE base of deposits that neither of those had and additionally, Citi has access to the FED discont window, which means that it has access to illimited liquidity. Furthermore, Citi can issue debt guaranteed by the government if necessesary.

Saying that Citi´s business model explains the stock price crisis is crazy. Maybe its not the best model, but this is not new information so why now this would explain the price crisis. Furthermore, some months ago a lot of analysts said that actually the business model worked when they saw what happened to Lehman.

So actually you don´t need the government to take over Citi to tae the pressure out of it, you just need the government to say that Citi is well capitalized, that it has adequate liquidity (and illimited access to them) and that it doesn´t need government funds and that the government stands back behind Citi´s debt, as it does with other banking institutions.

Short sellers will get crushed with this kind of statement.