Thursday, November 20, 2008


You heard it here first, the next biggest bank in the world, Citi-Morgan ... it makes a lot of sense for JP Morgan... but investment bankers on both sides will shudder because there is almost an exact replication, thus any merger will see at least 30%-40% of investment banking staff being cut. JP Morgan would value possibly the best global commercial banking franchise... provided the Treasury steps up and guarantee one or two hundred billions in losses (ala Bear Stearns). But I am getting ahead of myself, it may happen only.

$34.48 billion

Citigroup’s current market capitalization.

$126 billion

Citigroup’s market cap in April 2008.

$178.59 billion

Citigroup’s market capitalization one year ago.

$80 billion

The value of risky “legacy” assets that Citigroup is moving off its trading portfolio and into its investment portfolio or marked “available for sale.” These assets include collateralized debt obligations, leveraged loans, mortgage securities and auction-rate securities, according to Bernstein Research. They likely would have qualified to be bought by the government under the first TARP plan to buy troubled assets.

$8 billion

The value of legacy assets Citigroup kept in its trading portfolio.

$3.5 billion

The estimated fourth-quarter writedown that Citigroup might have to take on those $80 billion of assets when it transfers them, according to Bernstein Research.

$2.8 billion

Citigroup’s most recent loss, in the third-quarter.

$2.2 billion

Citigroup’s loss in the second quarter.

$9.83 billion

Citigroup’s loss in the first quarter.


Citigroup’s net income per employee.


Citigroup’s return on equity — a measure of management effectiveness — as of Sept. 30.


Citigroup’s return on equity as of Sept. 30, 2007.

$800 million

The price that Citigroup paid to acquire Old Lane, Vikram Pandit’s hedge fund.

$165.2 million

What Vikram Pandit earned from the sale.

$202 million

Citigroup’s first-quarter writedown on Old Lane. The bank closed the fund in June.


Yesterday alone, Citigroup slumped a record 23 per cent to US$6.40. This beat the 21.7 per cent drop it registered during the Black Monday crash in October, 1987. Citigroup just a few days back announced it was cutting 52,000 jobs reduced its workforce to around 300,000 worldwide. When we see share price collapses in Washington Mutual, Countrywide or Wachovia, we watch things unfold as spectators. Those things don't hit Asia. But Citigroup does.

In January, the Government of Singapore Corporation (GIC) had invested US$6.88 billion in Citigroup via a convertible bond issue. Today regional Asian banks were whacked. Just considering the massive bank transactions between Citi and other banks is sufficient to make investors reconsider about counterparty risks and systemic risks. Will Citibank survive??? Citibank has an unquestionable franchise globally in banking, possibly only surpassed by HSBC. It still has enormous deposits, though much of it is from outside of the US as invetsors have pulled much of their deposits from any and every US bank. The developments yesterday will probably cause a substantial number to yank their Asian deposits out of Citigroup now. Things can snowball very fast. Fear is the worst thing when it comes to potential bank runs, then suddenly you cannot get any credit lines and things freeze up.

The selldown in Citigroup was due to Henry Paulson changing his TARP plans. Now he is not going to use the funds to buy toxic assets (as well he shouldn't because that does not add to the banks' capital at all). Hence the credit default swap market where CDS premiums on Citi has now widened to 360 bps – meaning that investors are willing to pay more to get protection against possible default on Citi. A CDS spread of 360 bps means that an investor must pay US$360,000 to get US$10 million protection on Citi.Citigroup has about US$150 billion - US$200 billion worth of distressed financial assets. Remember that Citigroup still has a lot of shit tied up with Lehman Brothers (please re-read Lehman Brothers, The Rosetta Stone posting). Now that was supposed to be taken off its book, but has since been thwarted by Paulson.

The bigger reason for Citigroup's share price collapse was the announcement that it would buy about US$17.4 billion in assets from structured investment vehicles, or SIVs, that were affiliated with Citi. It said that the move — which it called a “nearly cashless transaction” — would complete the bank’s wind-down of these troubled investment pools. Citi was a pioneer in the business of SIVs, which once made lots of money by issuing short-term notes to invest in longer-term securities with higher yields. They traditionally resided off the balance sheets of the banks that created and advised them. This meant that the banks are now starting to unind the SIVs on their own as no help is now forthcoming from the Treasury.

Citi now worth only US$34 billion, looks like JP Morgan could make a bid for Citigroup as well.... again with Treasury standing behind JP Morgan probably guaranteeing losses of up to US$100bn... one winner, many losers. After Paulson's mistake to let Lehman Brothers fail, they will not let Citigroup go down.

Cash is king, but bloody hell, where to put the cash... certainly not in a bank!


p/p/s ... actually Citi is a very very good bet now at $6.... after Lehman Bro, Treasury will NEVER let another inv bank fail ... which means.... merger or bailout.... merger = ppl like JP Morgan will have to pay btw $15-25 per share, close to BV.... with Treasury guaranteeing a couple of hundred billions.... so there is a 200%-400% upside, its a calculated bet

p/s photos: Aya Kiguchi


Richard Cranium said...

Your take on Citi being a good bet was something I thought as well some months ago.

Its even cheaper now. As you said in your blog on Heebner, timing the entry is the art that's hard to do.

Any other signs I should be paying attention to, before I take a position in Citi?


Richard Cranium said...

And, I also think Citi's problem may not end at just the mortgages. Credit card debt will also go south when the recession bites.

I think there's still some down-side, though I agree [& am severely tempted] to take a position on Citi.

Hamzah said...

well thought out - good read.

however, the redundancy & layoffs will discourage the new Obama Admin, so I see another US entity coming in :-)

Gamelion said...

If follow the same bailout plan lay out for Fannie , Freddie or Merrill Lynch ; Citi share will be worthless as the shareholders will get screw & rape until cannot be recognised !!!

Ivan said...

Halo . .i agree with dali comemnt .. US Gov will not let citi fall after lehman. .

it cannot be happen ..else, the boom will be bigger than we can expected. . .

anyhow, in term of valuation , i dont think US 6 is good. . .
maybe can get a cheaper some more. .. US4 ?

Minton Mckarkquey said...

Unfortunately, I think they've left it too long for a C/MS merger - the fundamentals are no longer there. I think there's a 40-50% chance of FDIC seizure over the weekend (

Richard Cranium said...

Well, well, well. Citi closed below USD 5.

Its even cheaper now!

Interestingly, today's CNBC mentioned some names as potential merger partners.

Seems like our Mr Dali knows something we all don't; especially suspicious when JP Morgan was NOT mentioned as a potential merger partner.

I'm going to take a position in Citi.

Azrir said...

Once Citi is nationalised, Citi staff at Menara Citi in KL can start writing CVs.....

Ivan said...

That is so bad for me. . .
wonder will citibank cut my bonus or not. . .

oh no.. .poor cny and new year. . .

Ivan said...

Hi dali,

Do you think, that is a huge mistake for citi to buy back US$17.4b toxic asset at this current situation ?

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