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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.

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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.