Saturday, February 28, 2009

Citigroup Stock Plunges 39% in one day...

The US govt has converted its preference shares to common shares diluting the stake of existing shareholders by 74%. Other holders of preference shares including the Singapore govt, Prince Awaleed will also convert their holdings to common shares.

It is reported that the GIC has converted its preferred notes at a price of $3.25 per share. Citigroup stock closed at $1.50 per share yesterday. This means GIC has now realised more than half its losses. It now has an 11% stake in Citigroup. Dividends for Citigroup shares is limited to 1 cent per share as Citigroup has taken plenty of TARP money from the US govt.
"It now means GIC are in the real danger zone. Equity holders are the first to absorb any losses. Or if the Treasury decides to inject more capital, they will get diluted," said an analyst at an investment bank, who declined to be indentified (see Reuters report above).

I have explained several months ago that Citigroup probably had negative book value. However, with the worsening US economy and continued falls in home prices, Citigroup will be deeper and deeper in the hole in the coming months. It will need more US govt money and that will further dilute its stock. Meredith Whitney who called the bluff on Citigroup more than a year ago said on CNBC that the stock is just not worth much because Citigroup is insolvent due to losses and maintain a sell on the stock. Citigroup will need cash infusion quarter after quarter until this economy well on its way to recovery. She suggests the US govt put money in the regional banks that are not caught up in this crisis instead so that credit can flow money to Citigroup and BoA is like putting money in a hole.

The good thing is Citigroup didn't get nationalised at least not yet. Nationalisation would have instantly wiped out existing shareholders. Also, the US govt is now a common shareholder which means it is less likely to wipeout other common shareholders because it will have to wipe itself out in the process. However, massive dilution is likely.

Here's an article that explains the problem with US banks. The problem is not just mortages but commercial property, business loans, student loans, credit cards etc etc.
"The scale of potential losses in consumer and business loans swamps what's left from the securities debacle by a factor of three or four to one. And the next wave, the looming defaults on commercial real estate loans financing the likes of half-leased retail malls, will soon cause a fresh round of pain. "We've now moved from the securities phase to the lending phase of the banking crisis," says Tanya Azarchs, a managing director in S&P's financial services ratings group. "For 2009 we expect that loan losses will be much worse than for 2008 and that securities write-downs will be much less."
Those looming losses make it inevitable that the government will shower the banks with more bailout billions - and get big ownership stakes in return. But that will fall far short of what most people think of as nationalization.

Now let's examine the second, far more dangerous menace lurking in the loan portfolios. The big four hold $3.6 trillion in credit card, home-equity, mortgage, commercial real estate, and other consumer and business loans. Those loans are deteriorating with shocking speed: Default rates will soon surpass the worst of any recession in decades. Since mid-2007, for example, the charge-off rate for credit card loans has jumped from 3.8% to 7%. Overall, the four big banks suffered charge-offs of around 1% of their portfolios through the middle of 2007. For the fourth quarter of 2008 the figure jumped to 2.6%. And things are getting worse - delinquencies in all categories are rising. Star analyst Meredith Whitney predicts that credit card losses will climb above 10%, far higher than in any recent recession.

How high will the losses mount? FBR predicts the banks will eventually write off about 9% of their loan portfolios, with the vast bulk of losses coming in the next three years. That would hit the big four with around $300 billion - or $100 billion a year - in credit losses, more than three times the projected damage from their toxic securities.

Based on this article 2 of the 4 banks will definitely survive if we don't go into a depression - Wells Fargo & JP Morgan. Bank of America is on the borderline and need some help.

But this is what the article says about Citigroup:

The true basket case among the biggest banks is Citigroup. Citigroup's core businesses in areas like credit cards, branch banking, and international corporate lending are so weak that it cannot generate enough revenue to compensate for the deluge of losses. That means its puny equity capital is destined to keep shrinking or disappear entirely. Citi executives are already asking Washington for additional aid in exchange for as much as 40% of Citi's common stock. And after the stress test, it will probably need more cash, making it all but certain that the government will end up with a majority stake.

A prudent move would be to start unloading some Citigroup stock on the market ahead of any possible US govt cash infusion that will result in further dilution.

This article is optimistic citing total losses of $100B each year by the big 4 banks per year over the next 3 years. This amount is manageable. If it is true, all the US Treasury need is $300B more to rescue the banking system. However, things may not be so sanguine. According to Nouriel Roubini aka Dr. Doom the figure is required is trillions.

The Geithner plan's stress tests to ascertain the amount required to aid these banks will provide a much clearer picture soon in April 2009. There is actually enough time to take stock before taking action given none of the banks need immediate cash. There is however one problem the market participants in particular shortsellers are getting impatient and have started to sell these stocks. ..they can precipitate a ratings downgrade as ratings agencies use stock price as one of the inputs for their ratings....this can force the US govt into early action.
Citigroup Beats WorldCom, Sets Stock Trading Record (Update3)
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By Edgar Ortega
Feb. 27 (Bloomberg) -- Citigroup Inc. set a record for the most shares traded in a single day in the U.S., beating the mark set by WorldCom Inc. in 2002, according to the New York Stock Exchange.
More than 1.77 billion Citigroup shares traded as of 4 p.m. in New York after the U.S. government agreed to a third rescue attempt that would cut existing shareholders’ stake in the New York-based bank by 74 percent. Citigroup shares fell 39 percent to $1.50, the lowest closing price since November 1990.
The Treasury Department said it would convert as much as $25 billion of preferred shares into common stock provided private holders agree to the same terms, the government said in a statement today. The conversion would give the U.S. a 36 percent stake in the New York-based company.
Increased government involvement complicates Chief Executive Officer Vikram Pandit’s attempt to restore confidence in the company. The government is supporting Citigroup because of concern its failure might roil weak global markets. The U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to Citigroup last year. The following is the New York Stock Exchange’s tally of the
five busiest sessions for a U.S. stock:
Company Date Shares Traded
Citigroup Feb. 27, 2009 1.77 billion *
WorldCom July 1, 2002 1.51 billion
AIG Sept. 16, 2008 1.23 billion
Citigroup Nov. 21, 2008 1.029 billion
WorldCom July 3, 2002 1.026 billion
*Volume as of 4 p.m. in New York.
To contact the reporter on this story: Edgar Ortega in New York at Last Updated: February 27, 2009 16:14 EST


Anonymous said...

Ouch! not paper losses anymore. Thanks Lucky Tan for giving us the updates on Citi/GIC and Temasek. I have learnt a lot from you during this financial crisis.

How's your Cosco shares by the way? You managed to sell it off.

On a side note: do you know a definitive book on forex, what "intelligent investor" is to equities.


Economist with a heart :)

Ghost said...

Sorry Lucky but you are wrong on one thing. Citigroup is nationalised already. When a government own 36% of the bank, there's no other word for it

Anonymous said...

Citi's value is prop-up by USD32 billion of goodwill brand name in their books.

Therefore in real terms, the bank is worth NOTHING.

The GIC preference shares should not be converted, KY's position in the bank wiped out USD5 billion of our national reserves. He is shameless.

Anonymous said...

I think the elites have gotten so cosy being conned and swimming in the same bed with their fellow elites in other parts of the world they have lost their common sense.

LuckySingaporean said...


Yep that is what Roubini said yesterday night - don't be deluded Citibank is already nationalised. In fact Roubini feels tha full nationalisation would be more painful but faster route to recovery. According to him the magnitude of the problem is just to big to do it piecemeal.

Link to Roubini Interview

Anonymous said...

An old preacher was dying. He sent a message for his banker and his lawyer, both church members, to come to his home.
When they arrived, they were ushered up to his bedroom. As they entered the room, the preacher held out his hands and motioned for them to sit on each side of the bed. The preacher grasped
their hands, sighed contentedly, smiled, and stared at the ceiling. For a time, no one said anything.Both the banker and lawyer were touched and flattered that the preacher would ask them to be with him during his final moments. They were also puzzled; the preacher had never given them any indication that he particularly liked either of them. They both remembered his many long, uncomfortable sermons about greed, covetousness, and avaricious behavior that made them squirm in their seats.
Finally, the banker said, "Preacher, why did you ask us to come?"
The old preacher mustered up his strength and then said weakly, "Jesus died between two thieves, and that's how I want to go."

Anonymous said...

i read in 154th today, that GIC is pumping more money into Citigroup???

gosh! ~!@#$%^&*

Anonymous said...

Below is a quote from Citigroup made in 2006

"Minister Mentor Lee is a modern-day visionary and a unique statesman who is respected world-wide, and it is a privilege for Citigroup to benefit from his understanding, insights and experience. I am honored that Minister Mentor Lee has chosen to be a special advisor to Citigroup and look forward to having the opportunity to work closely with him as we pursue our international growth strategy.”

In Parliament in 2000 it was mentioned that Lee Sr’s appointments would help to promote Singapore globally.

Here is the statement from GIC
"GIC supports the initiative by Citigroup and the U.S. government to strengthen the quality of the bank's capital base," GIC said in a statement"

So how can we not help. Its not about reserves but about promoting singapore globally and saving face.

Citi might have screwed up big time but they sure made one brilliant move in 2006.

Anonymous said...

This is like a blood transfusion for a terminally ill cancer patient. It will only prolong the agony. Some financial experts are saying that the US government should let all these institutions just go bust. It will make for a faster recovery, despite the initial deep pain of massive job losses.

The US is sadly following the prescription of the Japanese, just pump in money to prop up companies from going bust. It will be an exercise in futility. The anticipated recovery for Japan never came despite the Japanese Government pumping in more than US$
1 trillion in stimulus packages so far. And they are now still talking of buying up shares in the open market to prop up their value. They are at their wits end.

The manner in which the Obama administration is tackling the crises bears similarity to what the Japanese did and the fear is that this recession in the US and the world would be a long one.

Lost Citizen

Anonymous said...

Citigroup market capitalisation
Oct 2007 $237 Billion
Sep 2008 $98 Billion
27 Feb 2009 $8.18 billion

Bank of America
Oct 2007 $237 Billion
Sep 2008 $150 billion
27 Feb 2009 $25.25 Billion

Bank of America, absorbed Merrill Lynch in Sep 2008.

GIC invested billions in Citigroup
and Merrill Lynch in Dec 2007.

Bank of America may be next. Like that for GIC finish lah. No need PhD in finance/banking to tell.

LKY said wait for 20 to 30 years to see positive results? No need lah, 2 years can see already - fatal results!

I am worried about other judgements and predictions of LKY as well. Like medicine, I think he has well past his expiry date.

Anonymous said...

"LKY said wait for 20 to 30 years to see positive results? No need lah, 2 years can see already - fatal results!"

Hahaha, but with sadness lah

Hey the old idiot probably went to Brunei recently to borrow money man.

Anonymous said...

The Americans must be blind not to see that the vision of the old man (was) is diminishing. But they were cunning enough to lure him put Billions of SIN Dollars into their(American) Banks.