Friday, November 21, 2008

Will Shareholders of Citigroup get wiped out?

UPDATE: The DOW rallied almost 500pts today but Citigroup fell by another 20% to $4. The reason being an rescue is needed this weekend. Citigroup has put itself up for sale, however, there is a good chance the solution will involve the US govt. In every US govt rescue, the shareholders got almost nothing...AIG stock has fellen to $1 since the govt rescue. It is not clear what GIC bought exactly - its website reported that it is a "preferred convertible" that pays 7%. It is unlikely that they will ever get to convert and if they get 7% a year - they will have to wait 15 years just to get their capital back. In a few cases, the preferred share holders were wiped out. CNBC reported that Citibank has $200B in "questionable" assets. The spiral of its stock price downwards might cause a ratings downgrade and that will be a total disaster. This makes it necessary for the Citigroup problem to be solved by this weekend. The GIC losses will be clearer by this weekend. ....Temasek made an announcement that its "top executives" will take a pay cut of 20%.,... why bother to tell us this meaningless news.......cut from what level? The PAP talks about change and clearly one of the areas it is most needed is in GIC & Temasek. I'll write about this in my next post.

I owned "a little" Citigroup stock bought many months ago but I recognised the situation was highly risky and was prepared to lose that small sum. Along the way, I sold it for a loss. But what happened to Citigroup in the past few days indicates the bank is not in good shape. Citigroup is too big to fail but if it takes US govt money, shareholders will get wiped out.

There is reason to believe Citigroup has negative book value and under a prolonged recession scenario the company cannot make it.

1. Citigroup took in US$80B from SIVs into its balance sheet. SIVs assets composed of stuff that is the same as the underlying securities of Pinnacle Notes/Lehman Minibonds.

2. In the recent meeting, the CEO said that it expects the loan losses to increase by $1B in the next quarter. This is the next shoe to drop rising defaults from consumer debt.

A few days ago I wrote that the stock has dangerously fallen below US$10. It is now $4.90. The company is trying now to raise money by auctioning off itself or in parts. It is not clear how much GIC will get back for its convertible preferred securities ($10B worth!!!) . However, if there is a govt bailout perferential shareholders are wiped out ....Citigroup does not have much time, it is a matter of days before the US govt steps in and they will do it before the ratings agencies downgrade Citigroup to prevent the contagion damage.

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Citigroup sliding under debt cloud
Fri, 21 Nov 2008 02:18:11 GMT

Support from Citigroup's largest individual investor fails to ease worries over the group losing more than one-quarter of its market value. The main concern is whether Citigroup will have enough capital to survive billions of dollars of possible losses as well as being able to handle billions of dollars in potential credit losses and write-downs in 2009 as the world economy sinks into recession. The groups largest individual investor, Saudi Prince, Alwaleed bin Talal and a nephew of King Abdullah said that he planned to increase his stake in Citigroup, the No. 2 US bank by assets, to 5 percent from less than 4 percent, calling its shares 'dramatically undervalued,' CNBC.com wrote. The announcement did not halt Citigroup's slide. The shares slumped 17 percent to $5.30 as of 10:10 a.m. in New York trading, extending this week's drop to 45 percent on concern banks will post further losses next year as the economy falters. Sandler O'Neill managing director Jeffrey Harte told Fast Money that he thought that Citigroup was too big to fail. "The government learned from Lehman Brothers that you can't stick it to the credit markets or the system will collapse." He went on to warn investors that, "If it become necessary for the government to save Citigroup common shareholders will likely get wiped out." Harte continued, "Citigroup is among a handful of companies in great need of capital."

The Saudi Prince, Alwaleed bin Talal Alwaleed owns the Riyadh-based Kingdom Holding Co. and his companies are buying Citigroup shares because the prince believes they are 'dramatically undervalued,' Kingdom Holding said in a news release. The combined stake stands at less than 4 percent after recent Citigroup share sales diluted the holding, Bloomberg.com said. Kingdom Holding Co continued, "Prince Alwaleed is fully confident that Citigroup's universal banking model and global franchise will make it a long- term winner in the financial services industry." SM/HAR

13 comments:

Anonymous said...

Good job, Lucky Tan.

Looks like I need to keep up with your blogs closely to find out about my investments in Citi (via GIC hahaha!)

looks like we need blogs to keep updated with our investments, not MSM.

Anonymous said...

Please Lucky, I hope you're wrong for all our sakes. If citi goes downlike we'll ever be able to withdraw our CPF.

TeE said...

hey lucky,

Isn't it the case that only common stock are diluted in the event of cash injection i.e. issuance of more common stock to the US government?

It that's the case, wouldn't GIC's stake be better protected as a result?

Granted, we wouldn't be seeing dividends for GIC in time to come. But unless Citibank crashes into insolvency without external aid, wouldn't there still be substantial value in the preferreds?

Hope you can enlighten me on that.

Anonymous said...

i'm so sad.

given the current dire situation, i wonder what are the next major CPF changes to further lock in our money?

AlphavilleSG said...

$18!!! Lucky me! But hey, look on the bright side, I did better than minibonds investor, thus far :D

Onlooker said...

Most likely.
This is the Foresight of a LKK visionary who is full of hot air and Bushit.
GIC money is our money which is kept in a Fund.
It does remind me of totine of years gone by just waiting to see when the totine head will flee ( due to gambling debt).

AlphavilleSG said...

Wall Street likes that Tim Geithner guy, checked his CV, apparently he knows Chinese AND Japanese, must be very helpful... Good to speak their language when you are asking for money.

Anonymous said...

During childhood days, there was a bully in the football field that changed the rules as and when it suited him. His team won every game. Winning was not enough as he was winning too easily and complacency set in (getting fat). He then set out to level the playing field even further. As his team was the best around (based on historical records), there was no need for other teams, and in fact was not in everyone's interest as it leads to unneccessary tension and unhappiness, esp. everytime the rules change.

He was a bit of a Jedi and somehow everyone acquiescence. Largese grew as winning was a matter of legislation and they won every home match, but lost miserably in every venture outside the local turf.

Sad isn't it?

Anonymous said...

Hi 11:45 AM,

You captured my thoughts exactly. The same thing happened to our neighbour. This Jedi called M as a young doctor would give free medical help to the poor.

Unfortunately he was given the ring that controls all rings and he failed to throw it into the crack of Mt.Doom

Even JBJ said that our leader was once a great defender of public assembly.

Cheers,
Economist with a heart

ps - Lucky Tan you always manage to hit the nail. If only Singaporeans understand what Lucky is trying to say..so sad..but the rot has already set in long ago when the physics teacher was silenced. Even murderers are given a fair trial!!!

Anonymous said...

Goldman to take over Citi as they tried in Sep?

http://articles.moneycentral.msn.com/News/jubak-financial-crisis-fire-the-whole-treasury-team.aspx

Anonymous said...

I hope the US Government will not bail Citi out.

Whatever happens, Singaporeans dun get their CPF in full.

I rather we have no reserves, let the government work harder to give me that 300 dollar annuity which I would appreciate more.

Now, the annuity looks like a penny thrown into the beggar's hat.

Anonymous said...

If I am not sure, isn't the MM the advisor for Citigroup. Can anyone advise?

Mberenis said...

This is a great blog! Thank you for posting! Did you know the Citigroup bailout is going to give more hard money, lower APR loans, and grants to the people.

Bailout List for Citizens

What do you think?