Trouble In The Citi

Citigroup Shares Decline After U.S. Treasury Delays Stake Sale

Excerpts from Bloomberg:

By Michael J. Moore and Michael Tsang
Dec. 17 (Bloomberg) -- Citigroup Inc. fell as much as 9.3 percent in New York trading after the U.S. Treasury Department delayed selling its stake in the bank following a $17 billion new-stock deal.

Citigroup fell 23 cents, or 6.7 percent, to $3.22 at 10:56 a.m. on the New York Stock Exchange, the biggest decline since Sept. 15. The bank sold 5.4 billion shares at $3.15 apiece yesterday, less than the $3.25 the government paid when it acquired a one-third stake in the New York-based bank in September. Citigroup said Treasury won’t sell any of its shares for at least 90 days.

Investors demanded a bigger discount from Citigroup than Bank of America Corp. or Wells Fargo & Co., which together raised more than $31 billion this month to exit the Troubled Asset Relief Program. Wells Fargo, which trumped Citigroup Chief Executive Officer Vikram Pandit’s bid to buy Wachovia Corp. last year, leapfrogged its rival by completing a $12.25 billion share sale Dec. 15. JPMorgan Chase & Co. repaid $25 billion in June.

“The market cast its vote and they’re low down on the ballot,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas. “Citigroup needs to show steps to reinstall the quality of the brand.”

With the sale, Citigroup’s common shares outstanding increased to 28.3 billion. That’s up from 22.9 billion as of Sept. 30 and 5 billion at the end of 2007.

“More shares outstanding means less value per share,” said Edward Najarian, an analyst at International Strategy and Investment Group in New York, who has a “hold” rating on the shares. “The whole structure of their deal to pay back TARP wasn’t very good for common shareholders and that is being reflected in the pricing.”

Price Discount

The $3.15 price on the new shares was a 20 percent discount from the closing price on Dec. 11, before Citigroup announced the plan to repay TARP.

“Wells Fargo proved they can execute better,” said Michael Johnson, chief market strategist at M.S. Howells & Co., a Scottsdale, Arizona-based broker-dealer. Pandit, 52, is “sitting on one of the best investment banks in the world and Wells, which really doesn’t have an investment bank, still outperforms him,” Johnson said.

The government decided not to participate in the equity offering based on the pricing of the shares, according to a Treasury official. The U.S. expects to divest its ownership stake in Citigroup shares during the next 12 months, the official said.


We have been watching Citigroup closely for the past year. This financial gian
t was once the world's largest by market capitalization. It has dropped from $240 billion in July of 2007 to $73 billion today. Shares have dropped from the $47 range to $3.20 today.

Furthermore, we have a huge issue with Citi in terms of their balance sheet.
Officially they reported assets as of Sept 30, 2009 of $1,888.6 billion and liabilities of $1,747.8 billion.
However, banks have been avoiding GAAP like the plague.
When the threat of mark to market accounting raises its head, the st
ock market in general, and financials in particular, consistently drop.
The latest stats available show Citi with $140 billion of equity. We suspect, that if GAAP accounting were applied forcing Citi to state the lower of book value or market value, that they would be grossly insolvent.
Government officials may be aware of this problem and are reluctan
t to sell their ownership stake, as a future bailout is likely needed once Commercial Real Estate losses start to show up.

We are further concerned, that Citi is large enough and so loaded up with toxic assets both on balance sheet and off balance sheet that shares will continue to drop and trigger more trouble. We note that Citi shares have now fallen below the 200 day MA, and this is not the sign of a healthy asset.
With growing sovereign debt problems, and even greater cross connectedness in the financial system now than before the 2008 crisis, it seems possible that a smaller trigger may create volatility leading to an economic catastrophe.