Citi Considers Selling Itself, in Whole or In Parts (And is Barking Up Wrong Tree re Shorts)

Citibgroup’s stock price fell another 26% today to $4.71, bringing the week’s decline to 50%. The Wall Street Journal reports that the sudden decay is driving management to consider a radical restructuring of the company or an outright sale, moves that were deemed by management to be off the table as of a mere week ago.

There are apparently rumors circulating that Citi is on the verge of bankruptcy.

Moreover, as AIG, which unlike Citi, has lot of desirable assets, found that there were no buyers. Financial institutions are too capital starved to be sticking their necks out now, and private equity firms cannot meet their target returns without leverage, which they cannot get right now. And who pray tell would buy the entire bank? Citi is so large that any acquirer runs the risk of at least a partial reverse takeover. And do not say JP Morgan. That bank is already too large to fail, and merging with Citi would greatly increase systemic risk in the long term.

The Journal also notes that Citi contends that evil shorts are behind the fall in the stock. It’s blindingly obvious that the latest deterioration in financial stocks was kicked off by Henry Paulson’s statement last week that the TARP would in fact not be used to buy troubled assets, which in turn led to a plunge in mortgage-related instruments.

And as reader Michael pointed out, short interest in financial has been falling of late. Shorts cannot credibly be considered to be culprits in Citi’s woes. The data is from Short Alert Reserach:

Financial Sector (933 Companies) – Short Interest as a percentage of Shares Outstanding
07/10/08 6.29
07/28/08 6.12
08/12/08 5.90
08/26/08 5.83
09/10/08 5.72
09/25/08 5.01
10/09/08 4.26
10/28/08 4.08

A decrease of 35.1% in the short position from 7/10/08 to 10/28/08. Net buying every single period. Total current value of short position: $64.8 Billion.

From the Wall Street Journal:

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright…

The internal discussions are at a preliminary stage and don’t signal that Citigroup’s board and management are backing down from their insistence that the New York company has ample capital, funding and strategic direction…

Citigroup’s board of directors is scheduled to have a formal meeting Friday to discuss the options…. Meantime, directors have been talking by phone about what could be done to reverse the stock’s slide.

Top executives were locked in meetings Thursday to hash out a stabilization strategy….

The company, along with representatives of other banks, is lobbying the Securities and Exchange Commission to reinstate the ban it temporarily imposed this autumn on short-selling of financial stocks, the people said.

“You would think the regulators would want to exercise some leadership and protect the integrity of the financial-services world,” said one person familiar with Citigroup’s lobbying efforts.

SEC Chairman Christopher Cox said he would hold a teleconference with international regulators on Monday to discuss short-selling and other matters. In a statement, he said it was essential that “there be close coordination among international markets to avoid regulatory gaps and unintended consequences.”

Specifically, he said regulators would “explore possible coordination” to tighten short-selling rules as well as disclosing short positions.

Meanwhile, Citigroup executives and directors are rushing to bolster the confidence of investors, clients and employees. Members of the board are hoping Citigroup can weather the storm by becoming more transparent with investors and easing anxiety that tens of billions of dollars in risky assets are lurking on the company’s books.

On Wednesday, in one move aimed at quelling the uncertainty about Citigroup’s exposure to risk, the company said it would buy $17.4 billion in assets from its structured investment vehicles, or SIVs, complex investment tools that first encountered trouble last year due to their mortgage-related holdings.

Executives in recent days have been telling traders, brokers and other employees to reach out to clients and tick off a list of factors that showcase Citigroup’s strength. On Thursday, for instance, executives in the wealth-management unit arranged a Friday-afternoon conference call for clients. A brochure that brokers were asked to share with clients promises that the call “will help you to better understand the current financial crisis.”

The sell-off in Citigroup shares has led executives to start laying out possible contingency plans. In addition to pondering a move to sell the entire company to another bank, executives have started exploring the possibility of selling off parts of the firm, including the Smith Barney retail brokerage, the global credit-card division and the transaction-services unit, which is one of Citigroup’s most lucrative and fast-growing businesses, the people said.

Mr. Pandit, an enthusiastic defender of Citigroup’s existing mix of businesses, is loath to pursue such an approach, the people said.

Thursday’s stock slide came despite the announcement by Saudi Arabian investor Prince Alwaleed bin Talal bin Abdulaziz Al Saud that he will increase his holdings in Citigroup Inc. to 5%, adding that he supports the banking giant’s management…

The Wachovia debacle turned out to be a turning point for Citigroup. The deal’s unraveling highlighted the paucity of other options for the company to pursue in an era when many banks are merging in order to survive. Few other banks that Citigroup can afford to buy would bring similar levels of deposits, the lifeblood of banks….

Note that John Hempton has suggested that the reason Shiela Bair pushed the deal with Citi, despite it being worse for the taxpayer that the one offered by the successful bidder, Wells Fargo, was that it would have provided a route for a back-door bailout:

Sheila Bair – as readers will remember – forced Wachovia to sell itself in three days whilst other parties had not had anything like enough time to complete due diligence. She – unilaterally and incorrectly – told the world that this deal could not be done without government assistance. She unilaterally decided to issue a guarantee that on a pool of $312 billion of Wachovia assets Citigroup could not lose more than $42 billion. She made that decision even though Wells Fargo was telling her that all they required was more time to do due diligence.

Given that Wells Fargo was willing to acquire Wachovia at no-cost to taxpayers that looks like a very bad decision indeed. But this is the post assuming that Sheila Bair is smarter than all of us.

And so we need to understand the significance of that guarantee. The significance is as follows: Once Citi owns $312 billion in assets on which they can only lose $42 billion the remaining pool must be worth $270 billion. That $270 billion is guaranteed by the US Government – as the FDIC is a full faith and credit organisation. Citigroup can put that $270 billion (plus the $42 billion in non-guaranteed assets) in a pool and repo it – and as Treasuries yield very little they will wind up paying well under a percent of interest. The Sheila Bair decision was equivalent to a cash injection into Citigroup of 270 billion because the repo-market will turn government guaranteed loans into cash.

That cash injection is almost 40 percent of the size of the whole bailout package and it was given to Citigroup by Sheila Bair without congressional oversight. We got all stroppy at giving Paulson that sort of unilateral powers – but – hey – we are prepared to forget that Sheila Bair already has them.

By the way, Hempton now believes Bair will take over Citi.

Back to the Journal:

Citigroup executives also are weighing the possibility of selling the company or merging with a rival. Some analysts have pointed to Morgan Stanley and Goldman Sachs Group Inc. as potential suitors.

As for Morgan, Mr. Pandit spent most of his career there and still keeps in touch with Morgan executives including CEO John Mack. But people familiar with the matter said that Morgan wasn’t weighing a bid and hadn’t spoken to Citi about a deal recently.

Morgan and Citi held preliminary discussions about a merger in September when Morgan Stanley shares were under intense pressure. Morgan covets the bank deposits and the added brokerage business that Citigroup would bring, but Morgan would mainly bring to Citigroup an investment bank that greatly overlaps with its own business.

Goldman Sachs is in much the same situation. It, too, would potentially look at pieces of Citi. But buying the entire company, and the liabilities that come with it, would be a lot to bite off.

As one of my Japanese colleagues once pointed out, putting two sick dogs together will not produce a healthy cat.

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16 comments

  1. masaccio

    Short interest isn’t the only way to bet against Citi. The gross notional amount of credit default swaps outstanding is $66.6bn, according to DTCC. They say the net notional is $4.7bn.

  2. Anonymous

    A timeline seen in the CalculatedRisk comments today:
    ————————-
    April 13, 2007: Citi Buys Pandit’s Hedge Fund… There has been talk in recent days that Pandit could become a succession candidate to Prince…

    May 16, 2008: Pandit’s hedge fund not faring well… The news that Citigroup will essentially wind down Old Lane, the hedge fund firm that Citigroup bought for $800 million, may stand as an omen.

    June 12, 2008: Citigroup Closes Vikram Pandit’s Hedge Fund… Well, this is embarrassing. Citigroup has made the decision to shut down their Old Land hedge fund, which they bought just under a year ago for a whopping $800 million, from the guy who is now the company’s CEO.

    Lucky they’ve the TARP funds to pay bonuses to keep talent like this!
    DCRogers

  3. Steve

    AIG: The Sequel.

    Over 60% of Citi’s deposits are offshore, with varying degrees of local deposit insurance.

  4. bg

    my version:

    Tying two anchors together doesn’t help them float.

    And the government sponsored short squeeze was a one time deal. As you pointed out, those shorts moved onto to smoother waters.

    Citi is the next casualty on the negative equity train. Liquidate labor. liquidate autos. liquidate financials. We are close to capitulation.

  5. Anonymous

    I’m curious. I owe Citibank $1000 on my credit card. Why am I required to pay them back if they go BK? Isn’t it the equivalent of a person dying? I mean, corporations are people. The person died, so I owe them nothing!

  6. Anonymous

    Why would they want to be more transparent to stock holders?…….They are insolvent.

    Mr. Mortgage’s site is on top of this and has the numbers, it’s not pretty, for most all of the banks.

    Soon we will have one big bank call the Treasury, run by the Federal Reserve. I don’t see any other options.

    The taxpayers are in the insurance business (AIG) Real Estate business (GSEs) bank and brokerage business (numerous bank share holdings) soon to be in the car business and credit card business. All without voting privileges unless you consider electoral.

  7. ndk

    Over 60% of Citi’s deposits are offshore, with varying degrees of local deposit insurance.

    Fascinating number. You do realize how strongly this reeks of Iceland, right? I don’t think the U.S. will support a national champion at the expense of the country itself.

  8. shadowfax

    I interned at an asset management house over the summer, and one of the things they asked me to do was look at Citi’s off-balance sheet assets. The bank had a whopping USD 1.1 trillion in off-balance sheet assets (most of which I had no clue as to what they were). What I found extremely weird was that there were hardly any sell-side research reports that explained the significance of Citi’s off-balance sheet assets (this was in August, I don’t know if it’s different now). All the reports I read only talked about the stuff on the balance sheet – the only ‘professional’ report I could find on them was a Bloomberg news report. Even though I didn’t understand half the acronyms in the 10-Q, I figured that if Citi had to take those assets back onto its balance sheet and if they had to take writedowns on them, it would wipe out their tiny capital base. But I wasn’t entirely sure until this week, because I didn’t find a single analyst report talking about this. It was as if everyone was trying to pretend there wasn’t a huge pink elephant in the living room that was about to explode. Why didn’t anyone raise the alarm earlier? Is the prospect of a Citi collapse just too frightening to even imagine?

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  10. Richard Kline

    Citi has been dead since July 07. D. E. A. D. The continued stall on effecting a resolution to this rotting, flailing zombie has been emblematic of the _failure_ of Paulson and the current Admin to come to any serious terms with the scale of the present crash. We’ve seen 16 months of kick the can down the road on this, but it looks like the dead whale will rupture before 20 Jan. This entire outfit needs to be broken up into many bitty pieces, not consolidated with anything else. The ‘sale’ word is the desperate sobbing plea of anyone fool enough to be holding their equity or bonds. Let the capacity reutilization of the financial economy get begin in a big way here.

    Oh, and Sheila: Just seize the thing. Seriously.

  11. wintermute

    Agreed Richard, Shadowfax,

    Michael Shedlock was pointing out Citi’s 1$Tn of off-balance-sheet dubious “assets” a year or more ago – and how the unknowns in there made a mockery of their Tier 1 capital ratio.

    I consider that the fate of Citigroup is the acid test for the whole bailout paradigm. Especially as so many foreign depositors will need to be made whole – a very difficult call when GM/Ford/Chrysler are going to the wall – with huge domestic impact. $25bn going to foreign Citigroup depositors instead of Auto-makers is dynamite politically..

    Obama must be thanking his lucky stars that the whole credit crisis started on Bush’s watch!

  12. russell1200

    shadow

    In the Summer of 05 going into 2006, I was reading 10Q and other exiting items with regards to many of the fine banking institutions who have since made news (but not citi). I was constantly amazed at how shallow the analysts reports were. It was almost as if they didn’t even read the SEC filings.

    Somewhere in all the middle of the this I recall Countrywide changing from an accrual to a present value accounting method on their servicing business. But they didn’t bench mark it in a way that you could tell what it had done to their numbers for that Q. Nobody said anything.

    I wasn’t until one or two Qs later that they gave the number, and I think it was buried in the boiler plate warnings section of all places.

    And this is in 2005

  13. Anonymous

    Any one who has read Bronte Capitals article Sheila Bair and seizing Citigroup will be extremely worried about this situation. It is clear that there is a potential here even if a rescue is achieved to topple many other banks by providing a disincentive for investors to invest in bank holding companies.

    Will they be rescued today by options expiry or will we see another busy weekend of activity. I am inclined to think no rescue will be forthcoming with profitable parts sold off leaving a husk to collapse at some future point. The government would be in a difficult place having baulked at the protectionist auto bailouts, could it be seen to bail out further another bank. The clock is ticking.

  14. Anonymous

    Cash is, perhaps, not the biggest problem here. A criminal lack of honesty, truth, and trustwothiness is. The Federal government has fulfilled it’s metamorphosis from investor protectorate to criminal accomplice !

    Even as these “institutions” crumble, they are sucking in more investor money, with the gov providing cover. If Bernanke learned anything from his “study” of the GD, the biggest casualty was loss of trust and confidence in the financial system.

    We are caught between a rock and a hard place. The new team has no choice but to allow the Fascists to twist in the wind as the truth, the sunshine of free markets, seeps out to the investing public. Want to know what is really going on in the stock or bond markets. Wait until the value of your principle disappears in a tidal wave of front running insider selling, usually a day after the financial cartel has pumped the price up so they can sell at the highest price to the unsuspecting public.

    Trusting anything the government, business, or academia says is a leap of faith. These are the first and most enduring casualties and the ones that are killing us. Are there no decent Americans left at the top ?

  15. River

    ‘There are apparently rumors circulating that Citi is on the verge of bankruptcy.’

    ROFLMAO…

    For years we have known about the level 3 ‘assets’. No one dared call it BK!

  16. sanjay

    perhaps now they will do the right thing. They should have nationalized any bank that was unable to fund itself in the private markets. I think had they done that they would have been able to avoid the rot spreading into the real economy. The Swede’s showed the way to do it and the Japanese the way not to do it. Obviously we couldn’t adopt anything that “old Europe” had done

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