Wednesday, January 16, 2008
Vikram's Hot Pot
Citigroup's shares lost US$2.12, or 7.3 percent, to $26.94 a five-year low, following its quarterly results. It wiped away almost US$10 billion in market value in one day on top of US$125 billion lost over the past year. The loss for the quarter totaled US$9.83 billion, or US$1.99 per share, compared with earnings of US$5.13 billion, or US$1.03 per share, a year earlier. Citigroup's revenue declined to US$7.22 billion, off 70 percent.
Citigroup's biggest hit came from a US$18.1 billion write-down in the value of its investment portfolio. But the bank also set aside US$4 billion Tuesday to cover anticipated losses on consumer loans.
The reasons the results caused more panic:
a) Though the write dow was substantial at US$18.1bn, that still leaves Citigroup with more than US$30bn in SIVs. Analysts anticipate more write downs in the coming quarter because of that.
b) The fact that the bank set aside US$4bn to cover consumer loans hints that the sub prime mess and higher credit cost will surely be hitting the consumer in the coming months.
Vikram Pandit can only do so much write down judging from the fact that the bank has already asked for capital infusions from substantial shareholders and sovereign wealth funds. Plus he probably was instructed to cut dividends but if given a choice I think he would NOT be paying any dividends. Hence his hands are tied. Of course Vikram would have wanted to do more write downs but he has capital reserve requirements to meet, and can you imagine the bloodbath if Citigroup actually took a US$35bn capital injection from the sovereign wealth funds? That would have triggered "protectionist protests" and may hit a few limits with foreign ownership issues, plus it would have scared the market shitless.
Everyone knows that when you reveal bad news, its better to take the full whack one time rather than keep reporting sorry numbers quarter after quarter. This also highlights the problem with having quarterly reporting. Everyone wants a quick fix. If we had just half yearly reporting, Vikram may have more room to move. He may not need to write down so much as the situation and valuation of the SIVs could improve in 6 months. However, due to the quarterly reporting, all are focusing on treating the problem immediately. In a difficult market that is imploding, its hard to sell the securities at a good price and difficult even to try and do a valuation.
Just looking at the table above, its not sufficient to have the banks doing the write downs and having the capital injections. These capital injections does not mean the worst is over. These SIVs and CDOs are not made up vehicles, they actually make up of actual home owners - and they too will be hounded to either cough up or have their property foreclosed so that these banks can write back some of the amounts. The banks will end up holding the SIVs and CDOs, even if they sell them, someone will be holding them, and they all will want to collect from the people they lent to. Citigroup and the rest would want to write back as much as they can, so there will be a long way to play out: the homeowners will be pressed hard over the next 6-12 months. Just adding up the write downs from the table above comes to US$53bn. Assuming US$300,000 per home, we are looking at 176,666 homes. Its not the end, its the beginning of a difficult period.