There's a Riot in the Citi

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
 
-- Former Citigroup CEO Charles Prince, July 2007

Well, he got that one right: Things are … uh … definitely complicated for Citigroup (NYSE: C  ) these days. Not only did the music stop, but the entire dance hall also seems to be burning down.

Shares of the beleaguered bank have been cut in half this week; they've fallen 85% year to date. One share will currently put you back less than five bucks -- roughly what Citi earned per share in 2006. Formerly the largest company in the world, Citi now sports a market cap less than US Bancorp (NYSE: USB  ) -- a bank with almost one-tenth the assets.

Get the point? There's a riot in the Citi. But what are people so angry about?

Here are a few factors bewildering investors in recent days:

  • Fears that $25 billion injected by the Treasury last month won't be enough to cover the massive slug of impending write-offs.
  • Word that it would move $80 billion in assets into a category that doesn't rely on market prices.
  • Citi's decision to purchase more than $17 billion in off-balance-sheet SIV investments.

Let's address a few of these issues, shall we?

Too little, too late
Citigroup is far too big to start throwing around the dreaded 10-letter "B" word. With the government as one of its largest shareholders, and more than $2 trillion in assets, there's simply no way Citigroup can fail.

Nonetheless, that doesn't mean common shareholders can't be crushed, if not completely wiped out, if things get worse. Remember, AIG (NYSE: AIG  ) , Freddie Mac (NYSE: FRE  ) , and Fannie Mae (NYSE: FNM  ) were all "saved" while leaving their common shareholders holding scarcely more than penny stocks.

Citigroup had roughly $99 billion in common shareholders' equity at the end of October. That might seem like a lot, but remember, it's covering around $2 trillion in assets. With that said, it won't take much more than a stiff breeze from a credit-market trauma storm to put shareholders in an even more vulnerable position.

One big fear is that Citi will need to raise more capital to keep things under control, but it won't be able to do so with shares trading at such paltry levels -- much like the dilemma Lehman Brothers faced. If that were to happen, the fate of the company would likely be in the hands of Uncle Sam.

Shhh ... they'll never know
Making matters worse, judging what future losses might be just became a bit more complicated. Earlier this week, Citi announced that it would reclassify $80 billion in assets into categories that aren't marked to market -- such as Level 2 and Level 3 assets.

The obvious hitch here is that it gives investors the impression that management is trying to mask how dire the books are, playing a game of "catch me if you can" with its sketchiest assets. Citigroup already has 88.6% of its assets in those hard-to-value categories -- adding more just gives investors more reason to panic.

The urge to merge
One popular option to keep Citi going is to merge with a stronger bank. Within the past few weeks, some have thrown around Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) as possibilities, since both became bank holding companies and will eventually acquire some sort of deposit-bearing assets.

Unfortunately, any other financial institution will be hesitant about making a deal with Citi until it can be assured that the bank's books are done exploding. That ultimately means providing clarity to those Level 2 and Level 3 assets. Until it does so, Citi just looks like a ticking time bomb that no one wants to touch. Would you want to marry someone with that much baggage? Me neither.

Keep your distance, Fools
Unfortunately, investors buying at these prices are probably looking at a binary outcome -- they'll either lose everything or make a bloody fortune. If that kind of risk intrigues you, enjoy the ride. For most investors, I doubt Citi's upside potential is worth the risk.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.


Read/Post Comments (7) | Recommend This Article (30)

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 November 22, 2008, at 11:48 AM, Stockodds wrote:

    Lose everything or make a bloody fortune...kind of strikes me as every current stockpicker's predicament in the current market.

  • Report this Comment On November 22, 2008, at 12:43 PM, FinancialFellow wrote:

    I agree with your "you'll either make or fortune or lose it all sentiment". I was debating whether or not to buy at $4 or wait until it dropped even more. Ultimately I figured it would either go under or recover to at least $20 a share (eventually) so there wasn't much point in waiting for it to go lower...

  • Report this Comment On November 24, 2008, at 3:48 PM, Knobee wrote:

    Of course, when the government underwrites all of your debts and possible future failings, why would it NOT go up?

  • Report this Comment On November 28, 2008, at 3:15 PM, GJOSHGREEN wrote:

    OK, I think the Fool has a position on Citi, and it's short. Here's why: C's assets are $2 trillion; Uncle Sam bailout will amount to $326B, or about 16% of the valued assets. Unlike WaMu, who was so heavy into subprime that you couldn't tell what else they had, Citi is diversified internationally. If they weren't bailed out, the markets would've been roiled worldwide.

    I think Financial Fellow is right, and it's a bounce to near $20/share, in the current environment. Beyond that, I think they stick around as one of few major entities and re-emerge.

  • Report this Comment On November 28, 2008, at 5:55 PM, kmakati wrote:

    You are wrong! Citi will come back but it will take some time. It will follow the market. Being very simple to your comments that Citi is one of top World Banks and US needs it. It's been hit like all other co's due to the economy & rating guy's like you and personal opinions which i stop reading & following. With conservative CEO with existing economy and not enough time what you expect? Give time and see what happens. I have no fear for Citi.

  • Report this Comment On November 29, 2008, at 12:48 AM, 44humble wrote:

    This news letter was sent to my inbox today, and is so outdated its laughable. Citi is currently at $8.31 which includes after hour trading, and in my opinion the increase is modest as to what is to come. Granted this is during a five day rally which will probably come to an end on Monday but look at Citi long. They are here to stay, and the government involvement with Citi, in no way reflects Aig or fnm or fre. They own what? 15%, not a major dilution. Backing over 300,000 in loans with Citi to eat the first 29,000. How sweet is that for Citi?...Now they need to take advantage of this opportunity. Get the house and closets in order. They have no where to go but up long term.

  • Report this Comment On November 30, 2008, at 11:46 AM, commonsense1won wrote:

    Citi tried to provide affordable home loans. Citi failed to realize mortgage brokers and mortgage lenders and appraisers and realtors and sellers and local propety tax assessors and home and condo associations would rob homebuyers blind.

    Crooked developers and crooked administrators robbed hud of millions earmarked for affordable housing leaving poor people homeless.

    Now the middle class and upper classes will be homeless. Think of this when you see a 10 bedroom micmansion selling for 5 million, with no buyers, and the former owners going to prison for misappropriation. Think of this when you see usa homeless making usa look like Calcutta.

    Bill Gates said men can not be trusted to administer health and humane programs, greedy people rob the poor, the elderly, the disabled, rob working men, rob families, rob women, the greddy rob childrens milk and cookie money. Think of this next time you see a bloated pig like donald trump inflating real estate 10,000%.

    Home prices will correct at 10 cents on the dollar, once housing prices and rental units have dropped 90%, the housing market will be corrected. Bricks cost 5 cents a peice, cement costs a few dollars a bag, dead wood from trees is not scarce, drywall costs 3.75 a sheet, dirt/land is not a scarce commodity, plastic pipes cost a few dollars, paint is cheap and labor is 7.50 an hour. Housing and land prices were inflated way beyond actual replacement value. Half the usa was deluded and under delusion about the actual cost of dead wood bricks and dirt. The Amish still build a fine house for under $2000 in a week, add pennies worth of copper wire and you have electric. Gougers in real estate are deluded. Look for a 90% drop in housing prices. Rotted wood crumbling brick homes canot be given away in Detrot, Flint, NY, LA, Miami, Chicago, small towns and big towns all across usa, these houses are reverting back to mud.

    Building sector is dead. The cornerstone of usa ecnomy, building, is dead, all those workers have no jobs and no incomes. Over 3 million surplus usa housing units and no buyers no takers. Owners can not pay mortgage if tenants can not pay rent. Glut of rentals must lower price to compete for smaller lower income tenant markets. People are co-opting housing, 2-3-4 families under one roof, spare rooms rented cheap to relatives, neighbors and borders. Owners are handing over the keys to banks and walking away to live wth friends and family in AFFORDABL housing.. If you do not have affordable housing, you will sit vacant for the next 20 years. Prices will drop for next 10-20 years and not inflate again.

    THANK GOD

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