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The Long, Slow, Death of Citigroup

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"Political leaders must make the sound decisions critical for economic success, even when the politics are difficult."
-- Citigroup annual report, 2006

Ah, the irony.

Another day, another Citigroup (NYSE: C  ) bailout. I don't know what we call this one: Grandson of TARP? The Pandit special? Bailout round three? I've lost count.

Nothing's written in stone just yet, but The Wall Street Journal reports that Uncle Sam is set to convert most of its $45 billion of preferred stock into common stock, for an ownership stake worth as much as 40%. That would open the doors to quasi-nationalization of what once was the largest company in the world. The new ownership structure would be something akin to the government's partial takeovers of AIG (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , and Freddie Mac (NYSE: FRE  ) last year.

Good news? It has its ups and downs. For Citigroup shareholders, this plan is certainly better than a platoon of government officials marching in with American flags and employing full nationalization, as the market has feared for the past few weeks.

For Citigroup the company, converting preferred stock to common stock provides some breathing room, at least for now. By axing preferred shareholders, the burden of having to directly repay taxpayers is eliminated. With a new slug of common equity, asset writedowns will have a fresh capital cushion to charge against. At last count, Citigroup had about $23 billion in tangible common capital supporting almost $2 trillion of assets -- about as close to failure as you can get without collapsing.

For other banks, this should quell fears over the specter of all-out nationalization. Bank of America (NYSE: BAC  ) , in particular, was beaten down to Reagan-era lows last week, as dark nationalization clouds  loomed overhead. Even relatively strong banks like Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) fell off a cliff as the thought of a universally insolvent banking system gained acceptance.  

Don't miss the buy-one-get-mugged-free sale
For taxpayers, this is a pretty raw deal. While no new money will be added to the tens of billions already ponied up, the money we've already injected gets immediately hacked down in value.

Let's say all $45 billion of preferred stock already injected gets converted into a 40% ownership stake. Citigroup currently has a market cap of $10.8 billion, so a 40% stake is worth about $4.3 billion. Since first injecting preferred shares in mid-October, common shares have plunged about 90%. If taxpayers' preferred shares were converted into a 40% stake today, it'd essentially act like a 90% loss as well. In other words, "preferred" shareholders have fared about the same, if not slightly worse, as common shareholders. In case you're wondering -- no, it's not supposed to work that way.

For taxpayers who feel they've been mugged, you've now been sucker-punched, too. Citi's common stock will have to produce something in the neighborhood of a 10-bagger for taxpayers to recoup their initial investment. Adding insult to injury, bailout part deux back in November slashed common dividends to $0.01 per share, rather than the 5% dividends the preferred shares were receiving.

Will any of this work?
The biggest question, of course, is whether this approach will work. I have my doubts. Switching to common equity is a big step in the right direction, but -- like all other bailout attempts over the past six months -- it's likely too little, too late.

A recent report by independent research firm CreditSights predicts that Citigroup could be in store for another $101 billion in future credit losses. If those estimates are even in a ballpark range of accuracy, converting $45 billion of taxpayer funds into common stock will simply ignore how dire this problem really is.

As politically unpopular as all-out nationalization is, we can't keep crossing our fingers and hoping that maybe, possibly, the credit crisis has just been a figment of our imagination and everything will be OK if we keep implementing derisory measures. Someone, someday, has to bite the bullet and make tough decisions in the face of the pants-wetting news we're facing today.

For related Foolishness

Fool contributor Morgan Housel doesn't owns shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.

Read/Post Comments (25) | Recommend This Article (102)

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 February 23, 2009, at 2:48 PM, FinancialFellow wrote:

    I bought Citi bank when it was $3 the day before they were bailed out. Over several weeks it shot up to around $8. I shoud've cashed out then. Right now I'm sitting on a decent loss. So much for the "too big to fail" mantra.

    If the bank is ultimately nationalized I can only hope it is temporary measure. I fear that once a bank is nationalized it may be hard to make it private again. I just don't see the government letting go of something once it has its hands in it.

    We'll see if the latest attempt to bailout Citi works. I, like the authors, have my doubts though. Speaking of the government's attempt at stimulating the economy, you may want to check out this article. It give you a pretty good idea of what is in the stimulus package that you may benefit from:

  • Report this Comment On February 23, 2009, at 5:20 PM, Netteligent09 wrote:

    Citi Group needs a new management and Board of Directors, clean house, change policy.

  • Report this Comment On February 23, 2009, at 5:43 PM, sillygoose123n wrote:

    I feel badly for the stock holders, they have been robbed by congressmen who made rediculous regulations and took payoffs from those who benifited.

    At this point, there is no real hope for you though.

    It is time to declare bankruptcy so everyone can move on. At least you can write off your loss. Death has occured, it is only the machine that keeps breathing.

    If it is pronounced dead, you will be able to make plans and move on.

  • Report this Comment On February 23, 2009, at 6:20 PM, USAeconomist wrote:

    Citigroup is not dying; it’s a failed bank that needs to be restructured like any failed bank that the FDIC is handling. It has been predetermined that the failure of Citi will have a bigger impact on the financial world financial system and it is better restructured CITI rather than letting it fail. Unfortunately, the FDIC can’t handle such a task; it already has 22 Billion at risk (data ) and the best way to restructure CITI. The market should not be so worried about the government taking a 40 percent stake; this is really an investment and a commitment by the federal gobvernment to ensure that Citi prospers in the future. Once the bank becomes profitable again, the governments shares can be sold at at a profit as soon as market conditions dictate.

  • Report this Comment On February 23, 2009, at 7:03 PM, DrBuoux100 wrote:

    I'm with USAeconomist. We're throwing good money after bad, all in a misguided effort to assuage a nervous market. We ought to treat these "zombie banks," no matter how large, the same way the FDIC treats failed banks--evaluate assets and liabilities and then restructure. It would also help if everyone stopped applying the term "nationalize" to this approach, suggesting that by acknowledging the reality of a bank failure--and the loss to shareholders--we're somehow putting in place a system that eliminates private ownership of the banking system. Following the current bailout policy is much closer to "nationalization" than any sort of restructuring.

  • Report this Comment On February 23, 2009, at 7:22 PM, FoolishLane wrote:

    Morgan and others,

    I am a Citibank customer and own a CD account with them. Do you suggest that I cancel and withdraw my funds from them? I could get a penalty on the CD. Is it worth it?

    Could it get worst?


  • Report this Comment On February 23, 2009, at 8:25 PM, YRDOG wrote:

    Can anyone say ZOMBIE BANK

  • Report this Comment On February 23, 2009, at 8:25 PM, Dart65GTConv wrote:

    Does not matter. City is dead. Like GM taxpayer money to pay people to make cars for no customers. Whats next pay them to stand there then pay them to stay home. Its simple things have changed. Take a little poison at a time you adjust. Hide to many doses then have swallow at once, game over. Find another job.

  • Report this Comment On February 23, 2009, at 9:53 PM, HROLLER1 wrote:

    Wamu Truth..Please Help Get The TRUTH Out;

    On September 18th Alan Fishman the new CEO released a letter to shareholders in which he stated "Capital ratios describe the financial strength of a bank. Our ratios continue to be well in excess of the levels that government regulators require of “well capitalized” institutions. We also have an ample supply of funds on hand to meet your needs and the needs of our other customers and our day-to-day operations." That the WaMu bank was well capitalized has never been disputed and the OTS in a Fact Sheet they issued on WaMu on September 25th 2008 said "WMB met the well capitalized standards through the date of receivership."

    JPMorgan Chase is one of the primary stockholders of the Federal Reserve which means they have the power to force favors from the Federal Reserve. The CEO of JPMorgan Chase, Jaime Dimon, sits on The Board of Directors of the Federal Reserve Bank of NY. Citigroup is also a stock holder of the Federal Reserve. It is the Federal Reserves job to insure that its member banks have the liquidity to transact business. The member banks borrow and lend among themselves electronically every night to keep each other liquid. This is called the Federal Funds. If need be a bank can also borrow directly from the Federal Reserve itself through a process known as the Discount Window.


  • Report this Comment On February 23, 2009, at 11:41 PM, miaaway wrote:

    Bank of America was beaten down to Reagan-era lows. You make it sound like he put the market in the crapper. Please stay in the middle.

  • Report this Comment On February 24, 2009, at 1:53 AM, awallejr wrote:

    FoolishLane, your money is safe, assuming under $250,000. The interest rate "probably" is safe too, but in theory it could be adjusted upon a bank failure.

    Citibank and BAC stock are nothing but wallpaper now. MAYBE in 10 years they might recover. Ken Lewis should just resign. What he did to that bank is a true sin to the shareholders. Costly arrogance.

  • Report this Comment On February 24, 2009, at 10:47 AM, InvestmentBaller wrote:

    This would move taxpapers' current investment further down the capital structure, i.e., in the case of a bankruptcy (a real risk), taxpayers would be the last to get paid from a sale of Citi's assets. Given Citi's market cap of $12 billion, the government's current $45 billion investment represents a de facto takeover already. It is also unclear of what additional benefits taxpayers are receiving by converting its preferred stock. It may be more prudent to (i) keep the preferred shares, and (ii) lower the preferred coupon payment (assuming this is an impediment to Citi's "going concern" status). This way, in case of a Citi bankruptcy taxpayers will have a higher claim on Citi's assets than common shareholders. To learn more go to

  • Report this Comment On February 24, 2009, at 3:54 PM, John1936 wrote:

    It seems abjectly stupid to me to appoint the management that brought about the failure of the bank to be the management that saves the bank. Imagine what would happen if your favorite football team went 0-16 and you rehired the coach to rebuild the team.

  • Report this Comment On February 24, 2009, at 4:59 PM, Knute99 wrote:

    USAeconomist comments are in complete agreement with Paul Krugman's NYTs editorial:

    For years the FDIC has taken over insolvent banks, recapitalized them, and sold them to private investors. It's a proven formula. The only difference with Citigroup is its size. The taxpayers are going to take it in the shorts with any approach. The shareholders should lose everything since they allowed incompetent management to destroy their investment. A takeover would be the fastest way to get through the pain and get the banks working again.

  • Report this Comment On February 25, 2009, at 2:07 AM, coerte wrote:

    I've not heard much about the credit card debt held by Citi. As the economy worsens credit card debt default would seem to be the next crisis point. Meanwhile for the long term, Wells Fargo at 12 is a no-brainer as is Deutsche Bank at 18€. Deutsche Bank has taken no German Bailout funds to date. Eventually weak banks will have to die and relatively strong ones will emerge stronger.

  • Report this Comment On February 25, 2009, at 1:21 PM, max12345 wrote:

    I am a taxpayer and I feel neither "mugged" nor "sucker-punched" (please see the author's words above) It is pointless and self serving to say that one doesn't like the solution which the U.S. government - in the best judgement of its senior policy makers- has decided to implement unless a fully realistic alternative (that is unequivocally better) is suggested.

    Letting Citi go bust would create an effect that would dwarf the effect of having let Lehman Brothers go bust. Nationalizing Citibank also would create a very difficult to assess blow to American capitalism.

    Any other real and practical suggestions? If not, then kindly spare us with trying to put words in our mouths about what we might "feel" that simply are not accurate.

  • Report this Comment On February 27, 2009, at 12:01 PM, dancingfish wrote:

    max12345, I agree. The people who are complaining about government bailouts would be howling if the government allowed a Lehman+ event.

  • Report this Comment On February 27, 2009, at 5:36 PM, RobertArvanitis wrote:

    Hold on. 45 + 10.8 = 55.8 total. So 45/55.8 = 81% ownership, NOT 40%!

    Why is government so stupid, or so generous to existing shareholders?

  • Report this Comment On February 27, 2009, at 6:41 PM, Kopanitsa wrote:


    Can you briefly summarize what the difference is between "Tangible Common Capital" ($23B) and "Tangible Equity" ($93B - in the linked-to "Hurry Up" article)? Does the latter include LT debt?


  • Report this Comment On February 27, 2009, at 6:46 PM, cmfhousel wrote:


    Thanks for your question. The latter includes preferred shares. Tangible common capital strips out the par value of preferred shareholders.

  • Report this Comment On February 27, 2009, at 8:24 PM, whistleblower1 wrote:

    The author seems to be living in LA LA land. As a bank holding company Citi cannot go bankrupt ala Lehman. It can only be closed by the OCC and then taken over by the FDIC. Since the FDIC assumes all assets and deposits the insurance fund will be wiped out. That means the FDIC will have to borrow from the Treasury. The FDIC will also be tasked with selling the assets. If the someone like the Secretary of the Treasury can not figure our how to price assets how does anyone think a little agency like the FDIC will be able to do it. The FDIC is an agency that has third rate managers with no banking experience or imagination. When their examiners go into banks they have a check off sheet which they are required to follow. Promotions are based on correct spelling filling in the blanks and saying yes, not finding problems. Lets hope the FDIC never takes over a sizable bank it; will cause the collapse of our banking system. Just remember that INDYMAC was a comparatively simple bank relative to its balance sheet. It cost the FDIC over $8 billion to clean up.

  • Report this Comment On February 28, 2009, at 2:14 AM, nicko168 wrote:

    Based on the past weeks, the stock market has been a place for the guys to rally & show their frustration towards "Robin Hood".So, no matter what stocks u thinking of..forget it....

    Ultimately, do you know who's the real fools? Ha..Ha..

    Real fools are the one who plunge their own economy to zero together with the $787 billion stimulus plan. Why?

    They'll be slapping their own face caused it opens up the opportunities & competition to the "third" world to buy all the "CHEAP" US Companies..Arabi, China, Kuwait & maybe Iran, Iraq etc...

    Based on the recent news, US companies are selling off thier valuable assets (technologies, bank etc) in order to pull through the crisis & who are they selling to? Make a guess....AIG went to China, Singapore etc selling off their stakes..Another is selling their US technologies or commodities caused they're ridden by billions of dollars debt....At the end of the crisis, what will the US companies who once holds the supremacy in technologies, banking etc become? "Zero" is my answer...

    Who the losers? The real losers are the next generation facing the real US....

    There's a old chinese teaching:

    "To break one chopstick is easy..

    To break a bunch of chopstick, is difficult"

    To the real fools, WATCH OUT!!! Ha..Ha...

  • Report this Comment On February 28, 2009, at 2:43 PM, Ecomike wrote:

    Some people still just don't get it. Amazing. If you let Citi go into, it will suck everything else, world wide, including us under. It will dump huge quantities of assets on an illiquid market driving down the price of assets to the point that every one else goes broke on paper with mark to market rules. That includes making US Treasuries worthless in the process, which nearly happened in 1933 shortly after the Republican Hoover administration left office. The wave of bank failures, and liquidation of bank assets by 1933 had pushed the principle face value of US Treasuries down to 43% of their principle value. That was when the bank holiday was ordered, and all banks were closed for a week, to fix the system. Does it really matter whether the FDIC through the US Treasury eats the loss, or the US Treasury does it directly by buying common shares? Answer is no, it still comes out of tax payer pockets, except with common stock we have a way to pay back the Taxpayers someday by selling Citi stock back to the market after saving it, and it tells the world that the US Taxpayer (who can print money if needed), will not let Citi fail. You think Lehmann Brothers bankruptcy did damage, you ain't seen nothing till you let Citi default. FDIC is a nickel and dime operation compared to Citi.

    Get a life people, learn to think for yourselves. Also what many of you fail to recognize is that the problem now is not bad management, but a catalyzed self feeding deflation process that is eating assets values as too many assets are in an illiquid market right now. Only solution is for the Government to use the printing presses (if needed) to restore liquidity, and pull assets off the market until stability is restored, just like they did with the bad bank they set up the 1980's, it was called Collecting Bank NA, set up to hold the failed S&L banks assets when the FSLIC failed (which nearly took out the FDIC in the process). That was handled with printed Treasury money too, back in the 80s, by the Reagan team.

  • Report this Comment On March 01, 2009, at 4:31 PM, Gurgler wrote:

    I pondered getting a few Citi shares at $ 1.50. Then looked forward : just where will this company be in 5 or 10 years time. It isn't gonna recapture its past glory. Other banks, better managed companys, will leave it behind. Better to invest looking ahead, rather than by peering into the rear-vision mirror. Alot of brilliantly run companies out there, Citi ain't one of them.

  • Report this Comment On March 02, 2009, at 1:26 AM, cvbond wrote:

    By and large, well thought out comments. Does it occur to anyone that pandit took over the bank after crisis started and the ills were perpetrated before. He is the cleanup guy folks - for the perpetrators look elsewhere.

    As someone pointed out, and rightly so, letting the bank go belly up is not good for an already illiquid fear driven market. That would be a catastrophy. Regardless of what the fed does, we will be in the crapper for a while. Accept it.

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