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


Richard Cranium said...

Does that, then, alter your earlier suggestions that Citibank is a buy? Or did I get you wrong?

Or, are you now speaking like an economist that you are? On one hand, on the other?

Salvatore_Dali said...


i think so, doesn't it... unless to you I cannot change my mind... events unfold, things change... as I get the new developments, i have to call it like it is...

no need to be sarcastic.. just ask if my call on Citi has changed or not will do... the rest is bs...
dont be a smart ass if u want to chat...

Richard Cranium said...

Sure, people are entitled to change their minds.

Like a wise man once said, "I'd rather be happy than consistent".

Ivan said...


Maybe we can buy at US 2 when citi is at the level .. after the coming income annoucement. .

stoneman said...

I know some rich guy in Kl who bought millions worth of Citi's shares at 12+, and another guy at 9+.

Well moral here us : try not to catch a falling knife.

The issue here is the outlook is extremely cloudy.
I still remember years ago when I was in Christchurch - early morning at 6am. Driving to the airport. It was so foggy - i could only like see 10m ahead of me. It was scary. But i didn't want to miss my flight so I drove on. Guess what? When I reached the airport all the planes could not land ! Der..it was really bad. Thank God I made it safely.

As investors, we have that 'thing' in us most of the time - we do not want to miss out - just in case u know the rally start tomorrow etc.

But i realised my life was at risk by driving in such foggy condition. Heck i wont die if I miss the flight.

Likewise so what if I am late in jumping back into the market. ING Europe published an excellent report recently. Their study shown than in 70% of the time, investing 6 months later after the bottom outperforms those who jumped in 6 months earlier. Why? Cause the fall is 70% of the time more vicious than the recovery.

A research head advised me : the issue now is when is the recovery?

Till we can sort of get a clearer outlook - whatever signals we may be looking at can be a false start. Capital markets wont recover sustainably until credit markets eased up. Then again we may be wrong.

So do you want to be aggressive or conservative? It's your call.