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Citigroup Investors Need to Shrug Off the Bad News

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After opening down sharply, two and half hours into the trading day Citigroup (NYSE: C  ) is down 1.2%. Chalk this up to general market gloom, some unsettling news for the banking sector in particular, and some bad news for Citi that may have finally sunk in.

This just in
The broader markets are either down, or moving back and forth between positive and negative territory today: likely as good as things are going to get. Good jobs news is keeping these broader markets somewhat buoyant: ADP is reporting that 188,000 private-sector jobs were added in June, beating economists' expectations. Fewer people also filed for unemployment last week, as well.

The banking sector is taking more of a hit due in particular due to an announcement from the Federal Reserve that Basel III capital requirements will kick-in beginning in January. The good news here is, both Citi and Bank of America (NYSE: BAC  ) are essentially there when it comes to Basel III. Less welcome news for Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) is that the Fed is expected to ask more in capital reserves of banks that rely on short-term money to fund their day-to-day operations.

And even less welcome news for Citi investors is the superbank's $968 million settlement with government-run housing giant Fannie Mae, reported on Monday, for "breaches of representations and warranties on 3.7 million residential first mortgage loans sold to Fannie Mae that were originated between 2000 and 2012." 

Foolish bottom line
All things considered, being down 1.2% on a day like this isn't so bad. Again, look for good jobs news to keep the broader markets stabilized, as well as high hopes for the federal government's jobs report due out this Friday to do the same. And look for this news to help keep worries over the future of quantitative easing and fears of sickness in China's banking system at bay.

Basel III is inescapable, but that's a good thing: many U.S. banks, as well as foreign ones, are still too big to fail five, a full years out from the financial crisis. Higher capital cushions aren't necessarily the answer, but they certainly help. Citi had to write down $140 billion between 2007 and 2009, but now has $160 billion in tangible equity. Higher capital requirements may have made the financial crisis far less severe than it was.

As for the payout to Fannie Mae, it looked initially like Citi investors had shrugged this off, but maybe the almost $1 billion hit is beginning to finally sink in and is partially affecting the stock's performance today, though that shouldn't be the case. According to Citi, the bank's existing mortgage loan loss reserves will cover this payout. Of the two big banks that emerged from the financial crisis alive but reeling, Citi is a thousand miles ahead of B of A in its transformation back to a stable bank and a worthwhile investment. Investors ought to rejoice it's $1 billion, and not $10 billion.

The big picture? On days like this, fellow Fools, the best thing you can do is tune out the market noise and tune into the fundamentals of the companies you're invested in. Think long term: in the end, your portfolio will thank you, even if your broker won't. 

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9/28/2016 4:00 PM
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