Not Pretty in the Citi
By
Emil Lee
October 16, 2007
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Citigroup (NYSE: C) had a tough time in an even tougher environment this third quarter. And unfortunately, this isn't a lonely Citi; other big names like Lehman Brothers (NYSE: LEH), Income Investor selection JPMorgan (NYSE: JPM), Bear Stearns (NYSE: BSC), and Merrill Lynch (NYSE: MER) have all taken losses from leveraged finance, mortgage-backed assets, and other derivative asset classes. So if misery loves company, Citi has surely found it.
In a nutshell, revenue increased 6%; operating expenses ballooned 22%; and credit losses, claims, and benefits skyrocketed 139%, leading to a 57% drop in net income. Even Citi's own CEO, Charles Prince, described the results as disappointing. So the big question is, can Citi regroup?
It's tough to say. The capital markets depend on each participant's well-being. Citi has an advantage in that it's extraordinarily large, so any setbacks the company has will likely cause less damage. But its size can also be a hindrance to its growth and development.
The company should be fine, but a combined effort to restore order in the financial markets is likely the next step. As a result, Citi is front-running a new $100 billion "rescue fund." This will help restore calm to a more or less worried market. Whether confidence will be fully restored is likely to be determined by the amount of participation from these major financial institutions over the next year or so. But for the contrarian investor, now may be the time for due diligence.
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