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World's Scariest Stock: Citigroup

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What scares me about Citigroup (NYSE: C  ) ? 

Let's start with the obvious ... it's a bank.

I could probably stop there and gain the agreement of most investors, but I'll try to elaborate.

The beginning of the end
To understand the magnitude of Citi's woes, we have to go back to the late '90s. The repeal of the Glass-Steagall act -- a depression-era law designed to protect investors -- paved the way for Citicorp to merge with Travelers Group, forming what we now know as Citigroup ... the granddaddy of "supermarket" banks.

The idea seemed brilliant at the time: Slap every financial product you can think of together, forming a do-it-all behemoth where average Joes could deposit their paychecks, insure their car, and plan for retirement, while investment mavens could structure CDOs, form IPOs, peddle ARSs, and advise CEOs on mergers and acquisitions, all under one roof.

For about a decade, it worked beautifully. Shares tripled from 1997 to 2007, buoyed by juicy dividends. At one point, Citigroup even held the glamorous title of "world's largest company," a colossal giant home to trillions in assets and tens of billions in profits that could do no wrong.

And then the house of cards crumbled.

One heckuva Frankenstein
Citi's losses over the past year, while impressive, aren't the scary part. What's important is looking ahead, and that's what's frightening. When global demand for anything and everything financial was booming, Citigroup was drowning in profits. Business lined up at the door, begging to be charged exorbitant fees for products most science-fiction authors couldn't fathom.

Now that it's clear a huge chunk of those profits were just a bunch of malarkey, banks need two things to make it through the storm: a good reputation, and a niche. Citigroup lacks both. Years of piling on layer after layer of hodgepodge businesses have left it so complex that no honest analyst knows exactly what lies inside.

And as for a niche? Try to find a spot for Citigroup among the remaining banking giants:

  • Wells Fargo (NYSE: WFC  ) : The last remaining real-estate lender extraordinaire.
  • Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) : The last remaining investment banks with a shred of credibility. Whatever investment-banking business remains, it'll go to them.
  • Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) : Perhaps lacking focus, but still healthy enough to capitalize on others' woes: See Bear Stearns, Countrywide, WaMu, and Merrill Lynch (NYSE: MER  ) .
  • And Citigroup .... well ... no one really knows where Citigroup fits in these days.

Yeah, but ...
I know what you're thinking: Just because it doesn't have a carved out niche doesn't mean it'll make a bad investment. You may be right. Citigroup might very well soar from today's prices. After all, fortunes have been made in Vegas, too.

The way I see it, the blatant lack of position in the industry means that Citigroup's earnings and asset levels (or lack thereof) will be absolutely impossible to predict for a long, long time. In an industry already drowning with uncertainty, Citigroup adds an extra element of surprise: It has its hands in so many businesses and contains such a disorderly array of assets that an investment in Citigroup today qualifies as nothing more than a gamble.

What's it going to earn next year? In three years? What assets will it keep? How much can it sell those assets for? What amount of further writedowns can we expect in the future? What's the real value of the remaining assets on its books? Does management even have a plan?

Pity the investor who thinks he knows. He doesn't. I don't. You don't. Nobody does.

Bottom line
I'm not saying Citigroup's going under ... hardly. It very well may have bottomed. Again, no one knows, and that's the point. Investing isn't a game of fortune telling; it's a game of handicapping the odds of different scenarios and investing only when those odds fall in your favor. Right now, those odds are simply impossible to predict.

That's what scares me about Citigroup.

If it scares you, too (or even if you’re unafraid), rate it in CAPS, the Motley Fool’s free stock analysis community.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool's disclosure policy gives out "fun" size candy bars on Halloween and wonders why its house gets egged and TP'd every year.

Read/Post Comments (7) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2008, at 11:29 AM, Dadw5boys wrote:

    I disagree Citi has so very very many different investments all around the world hurting Citi very much would be diffucult. Plus with the tightening of credit Citi is in a great position to be the main company of choice for international traders to use in fund transfers, payments and currency exchanges.

    They are competely setup to do business in China and even have premission to open offices all over China.

    So the Chinesse who are great savers will be making deposits and creating value far into the futire for Citi.

    The U.S. Government will need Citi too to support the value of the dollar in the tuberlant months ahead.

  • Report this Comment On October 31, 2008, at 12:29 PM, swkwie wrote:

    When sovereign wealth funds invest in Citigroup, one can be sure that Citigroup has the rewards waiting for the patient investor. Afterall, Citigroup is an icon on its own. Citibank is well known in Malaysia and Singapore and so is Citigroup. vested

  • Report this Comment On October 31, 2008, at 12:35 PM, Jeffro269 wrote:

    Your opinions are valid to the point that your arguments are flawed based on several assumptions. First, you may be correct based on C's current track, but companies are both active and proactive in the decisions they make. Some of Citi's business units may serve them (and their investors/stakeholders) well while others will not. That is indicative of a diversified company such as Citi. But they do have assets that can be sold/leveraged as well for growth in other market segments.

    The fact that their a bank says nothing more than what the media said back in CY2001/2002 about airline stocks. In short, the media called people short of crazy for having airline stocks. Yes, DAL and CAL fell to single digit dollar stocks, but they also rose considerably. No one can EVER time the market perfectly...NO ONE!

    "...those odds are impossible to predict. And that's what scares me about Citigroup." To ease your fear, the odds should not be looked at as impossible but rather should be evaluated through odds of probability. Based on my age, risk tolerance and portfolio allocation of C, I assess the probability higher than you that C stock price will increase...significantly. That is, I assess the probability that C will restructure and become a stronger market leader to be pretty high. It may not happen next month or even over the next 3 years, but it will happen. And that's what excites me about Citi!

  • Report this Comment On October 31, 2008, at 7:13 PM, Dadw5boys wrote:

    Citi uses money as a tool investing to promote competition not to impede it like I have seen several banks do. Make large investments then push the small company into a takeover by a large frim the bank has a larger stake in. I have never seen Citi act that way in business.

    I like competition. That means more people have jobs and more people are trying to improve how things are done not just a few who control the world.

  • Report this Comment On November 01, 2008, at 11:16 AM, motleynarr wrote:

    I have not only relied on Citigroup for investments but have made deposits in several accounts at Citibank which advertises attractive interest rates. While the article creates doubts about the future of the bank and its stock value in these uncertain times, does anyone question the safety of deposits at the bank? I'd be interested in comments on that issue.

    Deposits are insured by the Federal Government (FDIC) but I fear that if the validity of that insurance is ever tested in a crisis, it won't have the funds to make good its vast guarantees.

  • Report this Comment On November 08, 2008, at 7:19 PM, NWA10000 wrote:

    How much does Citigroup have in counterparty agreements with

    Lehman? How much is Citi's breakup value?

  • Report this Comment On November 21, 2008, at 8:21 PM, Ozcutty wrote:

    Citi will definitely need a government bailout. To what extent that hurts share holders is the unknown. Juding by AIG, FRE and FNM i wouldn't like to be one of those shareholders right now.

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