naked capitalism

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.