On Friday, CNBC's David Faber addressed a simple, yet overlooked, trait of Citigroup (NYSE:C). As shares continue to surge higher, Faber's observation is worth repeating here:

One of the key things investors in Citi need to understand, of course, is that when all of the exchange offers for the preferred into common are concluded ... it will have approximately 23 billion shares outstanding. Now, that is not fully accounted for right now. If you go on your system, or you look at Yahoo! Finance ... you won't see that share count because [the conversion hasn't] ultimately concluded ... but it will in a few weeks ...

You know how to do the math: 23 times $4.75 or so where the stock is, and you get a $109, $110 billion market value for Citigroup.

That's a market value that company had when things were going fairly well. Not necessarily when it was making $20 billion a year, but you get the point. Yes, there may be lots of earnings power yet to come at Citigroup. But as the company restructures, as it continues to shed jobs and units, it's very much unclear where the earnings power is going to be, and you can be sure that losses are still going to be taken.

As I showed a few months back, Citigroup's conversion of preferred to common equity -- much of which taxpayers own -- results in a 75% dilution to existing common shareholders. Once it's completed, shares outstanding go up about fourfold.

As Faber notes, this isn't yet accounted for on most finance sites. Yahoo! Finance shows that Citigroup has 5.5 billion shares outstanding, and a $26 billion market cap -- a fraction of the more realistic $110 billion. If you're bullish on the banking sector, $26 billion might look rather appealing. Four times that amount ... not so much.

For perspective, Citi's effective $110 billion market cap is just barely below that of Wells Fargo (NYSE:WFC), a bank still making profits. Record profits, actually. It's also substantially above the market cap of Goldman Sachs (NYSE:GS), a bank making so much money it had to tell its employees to avoid public attention.

Amazingly, Citi's $110 billion market cap is almost the same capitalization that JPMorgan Chase (NYSE:JPM) -- by far the strongest of the big banks -- commanded just six weeks ago. Think about that.

These are different companies with different balance sheets, so direct comparisons aren't entirely fair. But the similarities between what the market is apparently willing to pay for a bank making money hand over fist, versus one that's a bloody disaster, is telling. And it shows that Faber is probably on to something.

Consider two points:

  • Last quarter, Citi reported a $4.3 billion profit. But all of that was made up of a one-time gain related to selling most of one of its crown jewels, Smith Barney, to Morgan Stanley (NYSE:MS). Without this one-time gain, the bank would have reported a quarterly loss of many, many billions of dollars.
  • Management isn't shy with how it feels about the strength of its assets. It's quarantined about one-third of Citigroup's balance sheet into a unit called Citi Holdings, with the rest going to a new division called Citicorp. Citi Holdings is so dreadful, CEO Vikram Pandit prefers you just forget about it. "We want to be Citicorp, not Citigroup, going forward" he told BusinessWeek. "We're methodically selling and rationalizing what we call Citi Holdings."

When a bank is busy selling and rationalizing one-third of its balance sheet, we have to reiterate Faber's point: It's very unclear where the earnings power is going to come from.

What do you think? Is this a company for which you'd pay $110 billion? Let me know in the comment section below.

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