I’ve been catching up with my family and not on top of the news the last 24 hours or so – wasn’t there a time that the financial world shut down on weekends? – but for those of you who may not have a feed reader clogged with economics blogs (first, good for you), I wanted to point out some of the various outcomes you may want to bet on when it comes to Citigroup. Some people are betting that a deal (bailout, FDIC takeover, merger) may be announced as soon as this weekend. I doubt it, because Citi shouldn’t have a liquidity problem per se; now that the Federal Reserve is accepting pocket lint as collateral, Citi can keep functioning even after the markets have completely lost faith in it. The problem is that no one believes its assets are still worth more than its liabilities, so everyone expects the endgame will come (in one form or another) sooner or later. The big questions are whether no one will get wiped out, shareholders will get wiped out, or shareholders and creditors will get wiped out.
- Mark Thoma has an overview with excerpts from some other posts.
- The wildest idea is that Citi might merge with Goldman or Morgan Stanley, although this is only floated by unnamed analysts. What such a merger would accomplish is unclear to me. (Although various people have come up with the name for a Goldman-Citi merged entity.)
- Felix Salmon has a quick rundown with a lot of links (some of which I reproduced below); he thinks that at least creditors will not get wiped out to avoid a repeat of Lehman.
- John Hempton explains how creditors might be wiped out and why it would be a bad thing.
- Brad DeLong says to the government: go ahead, just buy the whole thing. With the change, buy a cup of coffee.
The Baseline Scenario 
Here’s a novel concept. Maybe the executives of Citi should just ignore the market.
Is the market price an accurate reflection of the state Citi is in? Are short sellers driving the price of Citi stock to ridiculously low levels? Do people outside the company really know what financial shape the company is in? Do people who set the rates for CDSs on Citi debt know what financial shape the company is in? In other words, is all this worry about Citi totally off base? Maybe it isn’t. Maybe it is.
However, if the depositors with Citi are not withdrawing their money (as they did with WAMU) and the bank can go on operating as usual, why should Citi executives not ignore the market, even if the stock price goes down to 50 cents? It seems to me it is the banks customers (both individuals and companies) who really matter, not outside analysts and short sellers. If these customers continue to stick with Citi, that is what matters.
Clearly, Citi has some questionable assets on its books, as do BAC and JPM. But the question of the losses (or gains) these assets will generate is sort of a long term question.
If I am Pandit, I keep doing what I have been doing.
Tom Krebsbach (Seattle area)
«if the depositors with Citi are not withdrawing their money (as they did with WAMU) and the bank can go on operating as usual, why should Citi executives not ignore the market, even if the stock price goes down to 50 cents?»
The main direct reason is that a low stock price means that it becomes very difficult for Citi to raise capital if there are any further problem, so Citi becomes very risky.
Indirectly, the low stock price means that the market thinks that further problems are very likely to happen, and existing shareholders are getting out before they get diluted or wiped out. And if shareholders think so, that is a signal for customers too.
Given the stock price action, you can only assume that smart depositors are transferring funds. It would be nice to know if in fact this is happening but we can’t.
Citi buying back SIV assets just confirms that it’s balance sheet is a wreck and they are increasingly having trouble performing their basic function of asset – liability matching.
The stock price is simply the canary in the coal mine. This company is toast and will not be the same company one week from now. My bet:
– Citi accepts some form of government bailout
– International assets are sold off
– Investment bank and asset management assets sold off
– Retail operations (branches) are merged with a regional bank that can offer some additional deposit funding (Citi retail execs shown the exit, keep the Citi name)
– Citi US credit card portfolio sold off to one of the larger issuers
In short, the company gets carved up, the name survives, most execs shown the exit and the government moves on to the next company.
God save us all but the next company to see this same fate is Bank of America.
This isn’t really true: “Citi shouldn’t have a liquidity problem per se; now that the Federal Reserve is accepting pocket lint as collateral, Citi can keep functioning even after the markets have completely lost faith in it.”
As Lehman and Wachovia found out, when customers start to lose faith the game is completely over. If public reports are to be believed, Citi is the first-ever case of a stock price collapsing into a black hole of panic even as the depositors and customers sit idly by twiddling their thumbs in happy circle after circle.
I’ve never been a believer in perfectly efficient markets and though this is the most imperfect, panic sensitive stock market I’ve ever seen, I’m not buying it. If the Citi shares are divebombing their way to zero, then I’m guessing the depositor flight is gradually taking wing. It’s over, though the end game is a mystery, for now.
Anarchus states:
“This isn’t really true: ‘Citi shouldn’t have a liquidity problem per se; now that the Federal Reserve is accepting pocket lint as collateral, Citi can keep functioning even after the markets have completely lost faith in it.'”
Sorry, Anarchus, I believe James is right about that. Here is a quote from Dealbook (NYTs).
“Among Citi’s advantages are its broad deposit base, most of which are overseas and therefore better diversified; its ability to draw from several Federal Reserve lending outlets; and its multiple protections from regulators like the Federal Deposit Insurance Corporation.
The firm is still pulling more interest income than it is paying out or writing off, and perhaps more importantly, it can still roll over its liabilities. Citi also has a relatively high 10.45 percent tier-one capital ratio, a common measure of a bank’s financial health.”
Please see http://dealbook.blogs.nytimes.com/2008/11/20/panic-over-citi-is-overblown-bove-says/.
Again, the crucial question is whether depositers are pulling out their money. If not, then this is all hysteria. (Undoubtedly, Citi and federal officials are monitoring very closely withdrawals at this point.)
But why should they pull out their money when it is guaranteed? If they are happy with the service, they will likely stick with the bank.
The market at this point is governed by IRRATIONAL ANXIETY (Sorry A. Greenspan). Why would anybody in their right mind take their cue from the market at this time about the solvency of an institution?
Indeed, right now is a terrific time to be buying stocks.
The question for Citi (and many other companies) is the long term: How will the recession affect Citi many months down the road? That is why it is so important that strong measures (stimulus) be taken as soon as possible.
Tom Krebsbach (Seattle area)
Well, that’s what makes a market, Mr. Krebsbach.
For the record, Wachovia had many of the advantages Citi has (not international, but more depositors) and got knocked out by a rapid-fire run on liquidity.
I’m neither short nor long Citi and don’t have a vested position in whether they make it or not. In 25 years of professional investing, I’ve never seen a stock fall so far, so fast, where there wasn’t something terribly negative going on behind the curtain. If there’s been no deterioration in Citi’s underlying business, (1) it’ll be a unique stock market event, (2) Citi will be just fine with no further aid from the government, and (3) longs will make tons of money.
It’s Citi’s off-balance sheet asset deterioration that is the issue. These assets have to be migrated back on the bank’s balance sheet. Major write downs resulting. I agree with Anarchus…where there is smoke, you will find fire. AIG type bailout coming for Citi.
NYT reporting government will intervene and, in effect, create two banks: a “good” bank and a governmnet backstopped “bad” bank.
As noted here (last summer Bloomberg article), Citi’s off balance sheet SPE garbage totalled $1.1 trillion:
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a1liVM3tG3aI
Lots of stuff flying around the unofficial rumor mill via MSM reports – good bank/bad bank, the gov’ts getting warrants, no they’re getting cold feet, who knows?
As one cynic noted (Calculated Risk for those scoring with us), “But I thought Citi WAS a bad bank?”
Actually, it’s beyond recognition as a bank… hence the forthcoming government assistance of the flavor du jour… I suspect we will know before the Asian markets open shortly…
For the record, I, too, have no postion in Citigroup nor any security in which the Feds have a financial interest.
Could be a dumb question. After having gone through “How FED works” post, just by looking at CITIs reserve at FED account and by looking at the way they borrow money using discount window or from other banks, FED should come to know how healthy they are right?
Also yahoo says they have almost 824.57B cash on hand. http://finance.yahoo.com/q/ks?s=C
Today WSJ says, Citigroup was nearing an agreement for the federal government. Does that mean FED knows smoke at their reserve? Can some one explain what’s going on here?
In general Federal regulators have the right to see a lot more information about the banks they regulate than you or I do. So the government should have a good idea of what is going on at any bank. I don’t know the specifics of that regulatory power.