Tuesday, January 13, 2009
Citi Is No Siti
Citigroup is likely to get $6bn in capital gain and a cash payment of $2.7bn when the deal to sell its brokerage unit to Morgan Stanley is successful. Citi was hammered yesterday when the rumours of the potential sale of Smith Barney looked to be a reality.
The sell down in Citi was prompted by genuine fears that Citi still needed to sell strategic assets after getting such a sweetheart deal from the US government. Citi has gotten so far: $25 billion in capital, followed by another $20 billion, followed by $306 billion in loan guarantees. If you looked at those numbers and still the bugger has to sell Smith Barney... well, look out.
To be fair, its not an outright sale yet but more of a joint venture for now. The latest version of the proposed deal has it that Morgan Stanley would pay Citi $2.7bn in cash for a 51 per cent stake in the joint venture combining their brokerage units. Morgan Stanley would get an option to buy a further 14-15 per cent of the venture after three years and raise its stake by a similar amount two years later.
Citi's arguably two most reliable income stream has to be the predictable income stream from the Smith Barney brokerage operation, and the hugely profitable and successful Banamex, which has a presence in Mexico that borders on the monopolistic. Now it looks like Citi is looking to sell both. How deep in shit you have to be to consider selling your best two income streams?
Citigroup lost nearly $10 billion during the last three months of 2007. The bank racked up more than $22 billion in bad loans last quarter. Citigroup's fourth-quarter operating losses could top $10 billion. Technically, you add the $10 billion from the last 3 quarters and if its also $10 billion for the final quarter - that is $20 billion, basically almost wipes out half of the $45 billion injection by Treasury in the initial bailout plan.
Not good, not good at all.
p/s photo: Siti Nurhaliza