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Let me be frank about my concerns with Citigroup
Would I go so far as to utter the dreaded "b" word? No, but only because Citi has the backing of Uncle Sam, which all but assures that you won't see the word "bankrupt" next to its name. What's more likely, and what's already occurring, is that the dreaded "n" word -- nationalization -- will take a hacksaw to the scraps of value shareholders are still holding onto.
A bank held together by Scotch tape and hope
Take a look at Citi in its current form. At the end of 2008, it had more than $1.9 trillion in assets supported by $150 billion in equity. Problem is, most of that equity is either government-injected preferred stock or intangible assets pulled out of thin air. When it comes to actual tangible common equity (what really matters to shareholders), Citigroup's on life support. As of Dec. 31, here's how the capitalization situation looked:
|
Total Assets |
$1.94 trillion |
|---|---|
|
Total Liabilities |
$1.79 trillion |
|
Intangible Assets/Goodwill |
$56.89 billion |
|
Preferred Stock |
$70.66 billion |
|
Tangible Common Equity |
$23.45 billion |
Now we get a more realistic picture of what common shareholders "own": $1.9 trillion in assets supported by $23.45 billion in tangible common equity. In layman's terms, we'll call it "one foot firmly in the grave."
Management finally seems to be coming to terms with reality, announcing plans to break itself up into a "good bank, bad bank" structure that could quarantine the worst assets. Good news for shareholders? Not really. For one, Citi has already sold the majority of one of its best assets, Smith Barney, to Morgan Stanley
As for the "bad bank," spinning off unwanted assets and forgetting about them, sadly, isn't quite that easy. The bad bank still needs enough equity to stay solvent. Where do you think it'll find that equity? I can think of one place -- good ol' Uncle Sam, of course. No one knows exactly what that means for current shareholders, but I can't fathom Citi's bad bank being allowed to suck wads of money from taxpayers without any compensation from the remaining good bank. For all intents and purposes, both entities may very well be treated as one and the same when it comes to compensation for further bailouts.
About those further bailouts
That's where things really get ugly. As the $700 billion bank bailout known as TARP reverts back to the original plan of removing toxic assets, companies like Citigroup and Bank of America
The bottom line: Those snippets of value that shareholders cling to are prone to be wiped out as the credit crisis lingers on. For those looking to score on a bank-stock rebound, other banks like BB&T
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