Tuesday, March 25, 2008

Things are amiss in Gotham Citi

Quote of the Month

Proverbs 22:26-27 "26 Do not be a man who strikes hands in pledge or puts up security for debts; 27 If you lack the means to pay your very bed will be snatched under you"

Position of the Month

Citi:
Position: Short
Opening Price: Above $27
Expected closing price: Below $16
Horizon: One year

Summary:

Citi is unwinding leverage in the capital markets while facing a deteriorating consumer credit business.

Position of the Month:

The Citi is in trouble, and everyone knows it.

The previously largest bank by market capitalization in the world is trying to get hold of all the problems threatening the company. The unwinding of off balance sheet debt positions (think Enron) led to the ratings agencies attempting to downgrade to junk six of their seven off balance sheet companies. In the last minute before six of the seven SIV companies were downgraded to junk, the SIVs were adopted on to Citi’s balance sheet. What remains of the $100B of asset backed securities that Citi was caught holding the bag with, $43B of the securities still remain.

But that was the first issue. Citi seemed to lending to it’s citizens seems to be too lax. Citi also purchased two subprime insurers at the top of the market that continue to cause writeoffs as the loans deteriorate. In addition, Citi took positions is securities and derivatives that analyst William Tanona estimates gives the company 37B exposure to subprime mortgages. This issue will continue to haunt Citi as the market reprices homes from the top of the market.

The bottom line for Citi is that mortgage losses, credit losses, and derivative losses all draw cash away from the bank. Unhedged long term positions threaten to bring the banks capital ratios down below the capital requirement levels required. If the people of Citi think the bank cannot repay, they will be very likely to take their deposits elsewhere.

Ok things are bad, but what is next for Gotham?

From the transcript of the Citi 4th quarter conf call…

"The American consumer is losing net worth at phenomenal rate with the decrease in housing prices. The Case & Schiller index of home prices indicates we are only in the second year of five year retreat in home prices. Much of the consumer economy of the past ten years has relied on or was financed by the increase in home prices. As the prices fall companies like Citi will have larger and larger draws on it’s available cash from it’s consumer operations to fund it’s illiquid leveraged positions, managing bank capital ratios against decreasing asset values, and continuing losses from lax lending areas from auto loans to credit cards."

Economic Outlook:

“Pyramid schemes and chain letters collapse because there is no more credit to feed them. As the system of modern day levered shadow finance slows to a crawl, or even contracts at the edges, its ability to systemically fertilize economic growth must be called into question.”

Author William Gross, “Pyramids Crumbling”, Investment Outlook, January 2008

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm

Summary:

The current unwinding of financial markets is repricing risk from historically low levels. When price trends reach the end of a cycle and start retracing prices tend to overshoot, not revert to the mean. So we can expect significant increases in the cost of consumer credit over the next couple of years.

To support the point refer to the CFO of Citibank as reported in the New York Times (1)

“Mr. Crittenden, the chief financial officer of Citigroup, had a different message on Tuesday, as Citi disclosed an $18.1 billion write-down. He told analysts that Citi was raising rates on credit cards and tightening the amount of credit it would extend. Asked by an analyst whether credit card lending was an area where Citi might want to “pull back or increase pricing,” he responded, “All of the above.”

Crittenden continues...

"Low Federal rates of turn of the century led to a credit boom with lax lending standards. Now that lenders are getting burned, the spigot is being turned the other way. This bodes poorly for overextended consumers.

Again the NYT reports…
“Citi is not alone. While the tighter credit market has not stopped credit-worthy individuals or companies from obtaining loans, it has made loans more expensive for many of them, and left those with the greatest need for cash far less able to obtain it.”
“They are parceling out credit with a keen eye on the balance sheet,” said John Garvey, the head of the financial services advisory group at PricewaterhouseCoopers. “There is a flight to quality and a renewed focus on risk.”


(1) “An Effort to Stem Losses at Citigroup Produces a Renewed Focus on Risk” by Floyd Norris
http://www.nytimes.com/2008/01/16/business/16place.html?em&ex=1200632400&en=077a0234cedf9ba2&ei=5087%0A

11 comments:

cdulan said...

Analyst Whitney predicts another huge Citi writedown coming up.

Bloomberg 3/26/08

"Citigroup may write down $13.1 billion of assets including leveraged loans and collateralized debt obligations in the first quarter, according to her latest estimate. U.S. bank earnings overall will tumble 84 percent in the quarter, she said.

``This will not be our last reduction in 2008,'' Whitney wrote in the note. ``We anticipate further downside to both estimates and stock prices'' because banks will be under pressure to mark down assets to reflect falling market indexes.

Citigroup may write down $9 billion on CDOs and $2.15 billion on leverage loans in the first quarter, Whitney said. She cut her full-year estimate for Citigroup to a loss of 15 cents a share, down from her previous forecast of a 75 cent profit."

http://www.bloomberg.com/apps/news?pid=20601087&sid=arsw3po56J80&refer=home

cdulan said...

cdulan: Lose $1B here, $1B there and it starts to add up

LA Times, 3/27/08

"Citigroup Inc. agreed Wednesday to pay $1.66 billion to creditors of Enron Corp. who lost money when the energy trading firm collapsed in 2001.

Citigroup was the last remaining defendant in what was known as the Mega Claims lawsuit, filed in 2003 against 11 banks and brokerages. The filer, called Enron Creditors Recovery Corp., alleges that with the help of banks including Citigroup, Enron kept creditors in the dark about the company's financial troubles by using shady accounting."

...the article continues...

"In addition to paying Enron $1.66 billion, Citi is waiving about $4 billion in claims it made against Enron. Citi said it agreed to a separate settlement resolving all disputes with the holders of Enron credit-linked notes. It declined to disclose the amount of the separate settlement."

http://www.latimes.com/business/la-fi-enron27mar27,1,6820281.story

cdulan said...

cdulan: More capital raising at the expense of the shareholder

Citigroup debt sale draws institutional demand

Marketwatch, 4/4/08

"Citigroup (C.N: Quote, Profile, Research) on Friday sold $4.5 billion of debt, taking advantage of improved demand for U.S. corporate bonds after Federal Reserve liquidity measures relieved worries about financial meltdowns.

The debt was sold at a yield spread of 300 basis points over Treasuries, or about 5.618 percent. That was 200 basis points wider than spreads Citigroup offered on 30-year bonds it sold in May 2007 before the global credit crunch."

http://www.reuters.com/article/marketsNews/idINN0437919120080404?rpc=44

cdulan said...

cdulan: A small effort to reduce their exposure in the credit card segment at a fire sale price

Citigroup sells Diner's Club

Marketwatch, 4/8/08

Earlier this week, Citigroup agreed to sell its Diners Club International credit-card processing business to Discover Financial Services for $165 million.

http://www.marketwatch.com/news/story/citigroup-reportedly-close-selling-12/story.aspx?guid=%7B5BEB2049%2DEE68%2D4128%2DB22D%2DDC9040CBD0DB%7D&siteid=yhoof

cdulan said...

cdulan: Loaning $9B in funds to a buyout firm so they will buy $10.8B in loans from your firm at a discount price is yet another desparate measure by a desparate firm. Citi guaranteed a 1.2B loss on this transaction and they are happy to do it.

Wall Street Journal
April 12, 2008

Referring to Citibank...

"The bank is scrambling to seal a deal with three buyout shops to unload about $12 billion of the risky loans by the time it reports first-quarter results April 18. It plans to sell the debt at an average price of around 88 or 89 cents on the dollar, say people familiar with the matter. On top of that cut-rate price, it agreed to lend the buyout firms about $9 billion to finance the deal as a further enticement."

http://online.wsj.com/article/SB120795000757408843.html?mod=hps_us_whats_news

cdulan said...

cdulan: Another shareholder dilution. Another desparate attempt to raise cash. The Tier 1 capital ratios do not look very good even after the preferred share offering.

Citigroup launches $6 billion preferred share sale: IFR

Monday April 21

NEW YORK (Reuters) - Citigroup (NYSE:C - News) on Monday will sell $6 billion in non-cumulative perpetual preferred shares, said International Financing Review, a Thomson Reuters publication.
ADVERTISEMENT


The shares are expected to pay a fixed 8.4 percent dividend for 10 years and pay a floating rate after that.

Banks this year have been increasing their issuance of preferred shares, which improve their "Tier 1" capital ratios, a measure of their ability to cover losses.

"Banks are moving to shore up their balance sheets after the losses that they've had and possibly in anticipation of further losses," said Standard & Poor's credit analyst Tanya Azarchs.

Citigroup's planned sale comes after it posted a $5.11 billion quarterly loss on Friday, hurt by billions of dollars of write-downs tied to mortgages, other debt and a slumping economy.

Responding to the loss, S&P on Friday put Citigroup's counterparty rating on review for a downgrade, saying problems with its loan portfolio are likely to depress earnings in the medium term.

The bank will have to sustain "high levels of quality capital," improve its earnings and maintain loan quality on par with other highly rated banks to preserve its rating, S&P said.

Citigroup's counterparty rating is now "AA-minus," the fourth-highest investment grade.

Citigroup has cut its dividend and raised more than $30 billion of capital, helping to boost its Tier 1 capital ratio to 7.7 percent from 7.12 percent at year end.

Regulators consider a bank well-capitalized if it has a 6 percent ratio. But, because the capital ratio is volatile, banks like to keep a cushion above the 6 percent level, S&P's Azarchs said.

Citigroup posted a $5.1 billion first quarter loss on Friday.

http://biz.yahoo.com/rb/080421/citi_shares.html?.v=5

cdulan said...

cdulan: Another shareholder dilution. Another desparate attempt to raise cash. The Tier 1 capital ratios do not look very good even after the preferred share offering.

Citigroup launches $6 billion preferred share sale: IFR

Monday April 21

NEW YORK (Reuters) - Citigroup (NYSE:C - News) on Monday will sell $6 billion in non-cumulative perpetual preferred shares, said International Financing Review, a Thomson Reuters publication.
ADVERTISEMENT


The shares are expected to pay a fixed 8.4 percent dividend for 10 years and pay a floating rate after that.

Banks this year have been increasing their issuance of preferred shares, which improve their "Tier 1" capital ratios, a measure of their ability to cover losses.

"Banks are moving to shore up their balance sheets after the losses that they've had and possibly in anticipation of further losses," said Standard & Poor's credit analyst Tanya Azarchs.

Citigroup's planned sale comes after it posted a $5.11 billion quarterly loss on Friday, hurt by billions of dollars of write-downs tied to mortgages, other debt and a slumping economy.

Responding to the loss, S&P on Friday put Citigroup's counterparty rating on review for a downgrade, saying problems with its loan portfolio are likely to depress earnings in the medium term.

The bank will have to sustain "high levels of quality capital," improve its earnings and maintain loan quality on par with other highly rated banks to preserve its rating, S&P said.

Citigroup's counterparty rating is now "AA-minus," the fourth-highest investment grade.

Citigroup has cut its dividend and raised more than $30 billion of capital, helping to boost its Tier 1 capital ratio to 7.7 percent from 7.12 percent at year end.

Regulators consider a bank well-capitalized if it has a 6 percent ratio. But, because the capital ratio is volatile, banks like to keep a cushion above the 6 percent level, S&P's Azarchs said.

Citigroup posted a $5.1 billion first quarter loss on Friday.

http://biz.yahoo.com/rb/080421/citi_shares.html?.v=5

cdulan said...

cdulan: Citi sells $6B in preferred shares and $4.5B in common stock. The common stock holder is seeing the value of their shares evaporate before their eyes. Citi is still not far above the minimum capital requirements. But how many more sources of capital are left? They raised capital using SWF, private investors, The Fed, Preferred Offerings, Common Stock Offerings, debt over 200 bps above treasuries, sold off Diners Club ($160m), CitiStreet ($900m), and other stuff. Yet they still don't have enough money???

Citi raises $4.5bn in revised offer

By Ben White and Francesco Guerrera
Wednesday Apr 30 2008 14:15
Citigroup (NYSE:C) raised a further $4.5bn to boost its balance sheet on Wednesday after strong investor demand prompted the US financial services group to increase the size of its latest equity offering by 50 per cent.

The move by Citi, which had originally planned to raise $3bn, underlines investors' recent desire to buy into financial services groups that have suffered significant share price declines as a result of the credit crunch.

The new shares were priced at $25.27 - a 4 per cent discount to Tuesday's closing price. The new cash call, which comes nine days after the issuance of $6bn of preferred shares, is likely to result in a slight dilution for Citi's existing shareholders.

cdulan said...

cdulan: The CEO Pandit ran this fund before becoming head of Citibank just four months ago. Already the returns have collapsed and the investors are running. This is a horrible event for a new CEO. I wonder if he will last until the end of the year. I doubt it.


Citigroup says most Old Lane investors to withdraw

By Andria Cheng, MarketWatch
Last update: 1:37 p.m. EDT May 3,

NEW YORK (MarketWatch) -- Banking giant Citigroup Inc. said most of the unaffiliated investors in its Old Lane hedge fund will opt to withdraw their investments.
In April, almost all of the unaffiliated investors had notified Old Lane of their intention to redeem their investments, Citigroup said in a regulatory filing Friday.
Old Lane, the $4.5 billion hedge fund that Citigroup bought in July 2007, had notified its investors that they will have the opportunity to redeem their investments without restriction, effective July 31.

The company said it recorded a pretax charge of $202 million during the first quarter to write down intangible assets related to the fund.
The exit will drain about $3 billion from the fund, the Wall Street Journal reported, citing unidentified people familiar with
the fund.

In March, Citigroup gave Old Lane's outside investors permission to withdraw early as a result of changes in the fund's senior management, including Old Lane co-founder Vikram Pandit's becoming Citigroup chief executive in December and fellow co-founder John Havens now heading Citigroup's investment bank, the report said.

Separately, Citigroup said Friday it sold $4.9 billion in stock in its recent offering -- about $400 million more than previously reported -- as a result of its own Citigroup Global Markets Inc. exercising an overallotment option to purchase more shares, according to Dow Jones Newswires.

cdulan said...

cdulan: This is out of control. The shareholder dilution is just relentless.


Citigroup Inc on Tuesday sold $2.0
billion in non-cumulative perpetual preferred securities

May 6 (Reuters) -

Citigroup Inc on Tuesday sold $2.0
billion in non-cumulative perpetual preferred securities, said market sources. The size of the deal was increased from the originally planned $300 million. Citigroup Global Markets was the sole bookrunning manager
for the sale.

BORROWER: CITIGROUP INC
AMT $2.0 BLN COUPON 8.50 PCT MATURITY PERPETUAL
TYPE PERP PFD ISS PRICE 25* FIRST PAY 6/15/2008
MOODY'S A2 YIELD N/A SETTLEMENT 5/13/2008
S&P SINGLE-A SPREAD N/A PAY FREQ QUARTERLY
FITCH A-PLUS NON-CALLABLE 5-YEARS
* $25 PAR

PENNY STOCK INVESTMENTS said...

The tarp warrants issued to the government during the financial panic by large money center banks could be a great buy if banking stocks recover.The governemnt has since sold off the tarp warrants they can now be bought in the open market.