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.
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