Citigroup: The End Draws Near

by: Vernon Hill November 21, 2008 | about stocks: C    

Vernon Hill

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The end is nigh for yet another great American company: Citigroup (C), once the greatest U.S. financial institution of them all.

As Tom Brown and I have noted many times, the whole idea behind Citigroup was flawed from the start. Unbeatable scale in financial services? Forget it. We now see the good Citi's size has done for investors: the company has an incoherent, unworkable business model. It is run by a senior management team that's largely unproven, with scant experience operating a large financial institution. And the company's risk controls (if the past few years are any evidence) are hopelessly inadequate to the task.

While the conventional wisdom says Citi is too big to fail, the reality is it's too big to manage. As a result, the company has become a publicly traded incarnation of Murphy's Law: anything that can go wrong almost certainly will-and probably sooner rather than later. And $25 billion in TARP money isn't going to do much to turn things around.

As we discussed when WaMu finally hit the wall, once problems reach this magnitude there is no solution.

Citibank in its present form cannot, and almost certainly will not, continue to exist.

Disclosure: None

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This article has 96 comments:

  •  
    Nov 21 03:36 PM
    would you be short perhaps?
    Reply | Link to Comment
  •  
    Nov 21 03:38 PM
    Citi will show them all up wait and see !

    Too many investments in too many areas including banks like MS, GS AND WELLS.

    If Citi dumps their shares of those banks what will happen then ?

    Barlays is Citi check out the major holders!
    Reply | Link to Comment
  •  
    Nov 21 04:05 PM
    Great article...!!!!

    Go with the wave...Just like the ANALists...

    this article has ZERO value

    Reply | Link to Comment
  •  
    Nov 21 04:06 PM
    It is easy to talk now. Why didn't you say that about their management when they were at the top?
    Reply | Link to Comment
  •  
    Nov 21 04:18 PM

    I spent the day analyzing Citi's financial statements looking for what they were doing wrong. They aren't doing things wrong. The present sell off is irrational and unjustified.

    Their loan loss reserve is bigger than the share price. Their operating cash flow is positive $45 billion per *quarter*. All of the recent losses are purely non-cash, due to filling up their loss reserves and marking to market assets declining in price but paying higher rates on their lower prices.

    Their cost of funds is 3% and they have pushed out the average maturity of their debt to 7 years. They can get through the next year without selling a single dollar of debt. They are earning over 6% on their book, for an interest margin over 3% - and their funding costs are falling, not rising. Yes, distress in the aftermarket has sent their bond yields to 10%, but the Fed has sent their short funding costs in the other direction and it is a bigger portion, since they don't have to refinance debts at the higher rates.

    Frankly, they could instead restore the magical tangible book everyone worries about by buying in their own debts at 75 cents on the dollar, out of free cash. Or their stock, come to that. All of it, in about 6 weeks.

    When a company could take itself private without exterior financing and fairly be worth 11 figures after doing so, Mr. Market's brains have left the building.
    Reply | Link to Comment
  •  
    Nov 21 04:35 PM
    Terrible article ... you are a kind of american who put more fire in the fire ...
    Reply | Link to Comment
  •  
    Nov 21 04:38 PM
    I have said this before to other columnists and I will say this once again - how can you guys say that the universal bank business model does not work, especially, in the light of why Bear Stearns and Lehman failed and why Goldman, Morgan Stanley are bank holding companies now? In fact, if there's one thing Vikram Pandit got right after inheriting the mess, it was his bold announcement that this company would not be broken up in pieces and that this was the right model. He was intensely criticised for raising so much capital so quickly ($40 bn by end of Feb) but he seemed to have called the following credit crisis absolutely right.

    I want to remind all his critics that point to his lack of experience in consumer banking - if that were true, wouldn't his first instinct be to actually break the company immediately instead of taking the time to understand how short-term funding costs have a tremendous impact on a pure play investment bank?
    Reply | Link to Comment
  •  
    Nov 21 05:23 PM
    Isn'tit amazing how these "Stock X is dead" articles only get written AFTER a stock goes down 50%.

    It's ridiculous how these writers operator:
    a) look at stock market
    b) jot down list of biggest gainers and losers
    c) cross-reference with archives to see if you can find old bits of informations to throw around
    d) write doomsday article

    Good job, smartass. But you're going to have to do better than say "It's dead and I don't know quite exactly why in details it's dying right now but the stock is down 50% so there you go".
    Reply | Link to Comment
  •  
    Nov 21 05:28 PM
    Right on. The credit-based economy was THE bubble of all time, and the growth of mega-banks was largely based on it. Derivatives and other instruments of the high leverage crowd were the food of choice at their "feast". The victims are those who work hard, produce, and save. The New World Order is at stake here: the mega-banks do biz with, and are subject to, the World Bank and IMF. Does anyone not foresee what is coming with so much foreign capital buying the remains of our tattered companies? Those who have actual capital, instead of phony assets based on credit are now the New World Owners.

    Freedom was at stake. But now we are owned by foreigners. Our government has utterly failed. Game over for them.
    Reply | Link to Comment
  •  
    Nov 21 07:02 PM
    Citi will not go down for the simple reason that the petrodollars from the middle east will gobble it up. They have borrowed citi tons. Citi is already positioned as a global banking firm with larger interestes outside of the US. In fact, Citi reported that they were seeking 250,000 protection from the FDIC. Citi will be owned by the middle east.
    Reply | Link to Comment
  •  
    Nov 21 07:33 PM
    Uptick rule NOW.
    Reply | Link to Comment
  •  
    Nov 21 07:51 PM
    Historical earnings means nothing with companies like this.

    The Market is essentially saying that C just won't be allowed or able to make money in the future. Everyone who is hammering their stock (hedgefunds) knows how corrupt wall street has been over the last decade and what a ponzi scheme it was in the wild Clinton/Bush years. These insiders know that the game is over and is betting Citi won't survive. The mart money targeted, Bear, then AIG, GE, Lehman, even GS, where they were all trained, C.

    What will be their next target?
    Reply | Link to Comment
  •  
    Nov 21 08:15 PM
    You provide no reasoning other than some irrational and emotional justification based on past precedence (WaMu) that is totally irrrelevant to the current circumstances. Whether or not Citi fails to exist in its current form notwithstanding, your ego driven grandstanding and the reaction you intend to induce is despicable. Reading your bio, i cannot believe you had held such high level positions in the banking system but then again perhaps we are where we are because of people like you. You were despised at CommerceBank despite having 'invented' evening and weekend hours. As many others have noted, you are a legend in your own mind. Go back to your golf and leave this to unbiased professionals. ZERO Value gibberish.
    Reply | Link to Comment
  •  
    Nov 21 09:08 PM
    the author is trying to tell you that Citi is too big to manage, and that is the message i took away from this article. i did not get the impression he was predicting it was going to fail.

    from my experience, i can tell you that you cannot directly scale up (or down) business models. when you do - any and all models will fail. at a certain point you must reorganize, and unfortunately that point is always at an economic downturn because that is when it becomes very obvious.
    Reply | Link to Comment
  •  
    Nov 21 09:14 PM
    Naked short selling is killing stock after stock.
    Citi is not a great bank but it is not in such a horrible shape either, it is the most international of all banks in the world.
    Unless this type of practice is banned for good, there is no telling where it would stop. The ordinary fold would read that Citi traded at near $3 and withdraw their money. We all know what would happen then.
    I don't see Paulsen , let alone Cox doing anythuing though!
    Reply | Link to Comment
  •  
    Nov 21 10:00 PM
    Not sure where this bout of insecurity came from. IMO Citi is too big to fail. I can't see them being bought by anyone else...

    I really can't see why the uptick rule can't be reinstated. That would really help the situation. Also, CDS swaps aren't trading nearly as high as other large financial institutions' were before they folded. As of yesterday, they were trading at 360 basis points, compared to over 3000 for the other doomed banks. I think Citi may be a buy here, but only with true MAD Money.
    Reply | Link to Comment
  •  
    Nov 21 10:42 PM
    Really. Get a grip and stop grandstanding just to get people to read your stupid article.You yourself state that Citibank was once "the greatest US financial institution of them all" and then compare it to WAMU -of all things? Jesus Christ man, get a grip on reality. You really gave me a laugh just before bed. Wamu? Are you kidding me? Wamu? What are you on? Too funny.

    Reply | Link to Comment
  •  
    Nov 21 11:47 PM
    Another jerk piling on. (Disclosure: not long or short C).
    This is a big part of the problem. People on the net and TV yapping endlessly about things they know nothing about.
    Reply | Link to Comment
  •  
    Nov 21 11:49 PM
    Well said, sir!


    On Nov 21 08:15 PM bankanalyst wrote:

    > You provide no reasoning other than some irrational and emotional
    > justification based on past precedence (WaMu) that is totally irrrelevant
    > to the current circumstances. Whether or not Citi fails to exist
    > in its current form notwithstanding, your ego driven grandstanding
    > and the reaction you intend to induce is despicable. Reading your
    > bio, i cannot believe you had held such high level positions in the
    > banking system but then again perhaps we are where we are because
    > of people like you. You were despised at CommerceBank despite having
    > 'invented' evening and weekend hours. As many others have noted,
    > you are a legend in your own mind. Go back to your golf and leave
    > this to unbiased professionals. ZERO Value gibberish.
    Reply | Link to Comment
  •  
    Nov 22 12:29 AM
    Citi is certainly very big. The sad thing is that it currently does not have a good top management that is able to manage this behemoth well, and its taking its toll on its employees and its clients. Stock price these days is quite a separate thing. Meanwhile, I will buy it only I see some real leadership at the top,
    Reply | Link to Comment
  •  
    Nov 22 04:45 AM
    There is one insight in this article - odd how it has attracted so many hostile reponses - Citigroup is too big to manage. I would go on to say it is too big to understand.
    What the stock price reflects is the market's simple answer to the question - Why would anyone want to buy common shares in the motley collection of suspect companies under the Citi umbrella where the consolidated balance sheet (never mind any SIV type stuff) is beyond comprehension. Parts of the group have so much exposure to illiquid asset backed instruments that no one understands and another part is super exposed to consumer credits which become increasingly vulnerable as the rate of unemployment rises.
    Reply | Link to Comment
  •  
    Nov 22 08:41 AM

    The answer is: to gamble. I bought 30 shares yesterday at 3.5...I'll leave it alone in my 401k until it either recovers (maybe in 5 yrs or so?) or goes bust (maybe in a week?). The worst I can do is lose $121 (including trading fees)...my girlfriend has lost more than that playing the lottery in the last few months.

    On Nov 22 04:45 AM morph man wrote:

    >Why would anyone want to buy common shares in the motley
    > collection of suspect companies under the Citi umbrella where the
    > consolidated balance sheet (never mind any SIV type stuff) is beyond
    > comprehension.
    Reply | Link to Comment
  •  
    Nov 22 09:20 AM
    You know this community really deserves better than articles like this. If you are not willing to give evidence other than a low stock price at least provide links to sites that do. Perhaps this should be directed more to the SA editors than the author.
    Reply | Link to Comment
  •  
    Nov 22 09:33 AM
    Talk not look at the mgmt you had at commerce it was mgmt by fear
    Reply | Link to Comment
  •  
    Nov 22 11:14 AM
    Citi may go down the tubes..who knows for sure? The thing that has me wondering is what if their bid for Wachovia had been accepted?

    More massive bailouts?

    What about their pending lawsuit against Wells Fargo?
    Reply | Link to Comment
  •  
    Nov 22 11:29 AM
    You make sense to me! There is so much talking head driven hysteria out there, it is easy to lose ones head. Your view is a breath of fresh air. I suspected that some of the bashing going on was ideology driven, but did not really understand until I read your many insightful comments on this site. Respect!


    On Nov 21 04:18 PM JasonC wrote:

    >
    > I spent the day analyzing Citi's financial statements looking for
    > what they were doing wrong. They aren't doing things wrong. The
    > present sell off is irrational and unjustified.
    >
    > Their loan loss reserve is bigger than the share price. Their operating
    > cash flow is positive $45 billion per *quarter*. All of the recent
    > losses are purely non-cash, due to filling up their loss reserves
    > and marking to market assets declining in price but paying higher
    > rates on their lower prices.
    >
    > Their cost of funds is 3% and they have pushed out the average maturity
    > of their debt to 7 years. They can get through the next year without
    > selling a single dollar of debt. They are earning over 6% on their
    > book, for an interest margin over 3% - and their funding costs are
    > falling, not rising. Yes, distress in the aftermarket has sent their
    > bond yields to 10%, but the Fed has sent their short funding costs
    > in the other direction and it is a bigger portion, since they don't
    > have to refinance debts at the higher rates.
    >
    > Frankly, they could instead restore the magical tangible book everyone
    > worries about by buying in their own debts at 75 cents on the dollar,
    > out of free cash. Or their stock, come to that. All of it, in about
    > 6 weeks.
    >
    > When a company could take itself private without exterior financing
    > and fairly be worth 11 figures after doing so, Mr. Market's brains
    > have left the building.
    Reply | Link to Comment
  •  
    Nov 22 11:38 AM
    Agree end of Citi is near the way the stock price behaves and its effect on its business eg people might lose confidence leading to loss of business/deposits and vicious down spiral like Bear Stearns/Lehman. Only the govt can bail out Citi.
    Reply | Link to Comment
  •  
    Nov 22 11:56 AM
    As a new investor in the stock market, I have watched Citi's stock price fall over the past 6 months with some amazement. As someone who is willing to learn from others more experienced than I, perhaps someone would be kind enough to comment. I think the stock price reflects reality. Here's why:

    1) Regarding short sellers, Their Oct.28 disclosure of short interest shows only 3% of the float being shorted. Is this nearly enough to cause the stock to crater?

    2) No one has really mentioned the 1 Trillion dollars of SIVs that are STILL hidden on the balance sheet and the perceived counterparty risk to these SIVs. They have not magically gone away in the past 6 months and are waiting like an exploding time bomb. If anything the risk has become greater, IMHO.

    3) In the near future, Option ARMS , credit cards and auto loans etc. are going to be piling up losses faster than they can be counted. This is NOT going to help matters much.

    Disclosure: No position on Citi, but watching with interest. Please comment.
    Thanks!
    Reply | Link to Comment
  •  
    Nov 22 12:02 PM
    Financially, Citi can survive. Short sellers are on the rampage and naked short sellers should be put in jail! Paulson has chosen to leave his job early and should be fired immediately for incompetence. Bush just left the country in a crisis. Reinstate the uptick rule and provide Citi a bridge loan. Otherwise, Citi's failure will show us what the "new" great deprssion will look like when the government institutes a national bank holiday through the end of January 2009.
    Reply | Link to Comment
  •  
    Nov 22 12:23 PM
    Citibank is neither too big to manage, nor too big to fail.

    It is, however, almost certainly too well connected to fail. The line separating private governance and public control of banks has blurred; Citi and Goldman Sachs are the primary points of crossover. Look at the players, and explain to me how Citi will be allowed to fail.
    Reply | Link to Comment
  •  
    Nov 22 01:15 PM
    City should buy own stock. It is stupid not to. If they can not support their ow stock who will? Board should vote for it.
    Reply | Link to Comment
  •  
    Nov 22 01:56 PM
    Jim Rogers always said that citigroup or citibank as he calls it was in trouble.

    jimrogers-investments....
    Reply | Link to Comment
  •  
    Nov 22 02:34 PM
    Would you please allow me to ask a stupid question? In the U.S. of A we have thousands of banks. Do we need so many banks in this economic and financial crisis environment? As Jim Cramer said recently, the after fact of the symptoms the belies now after Wall Street giants came down as if being dynamited, or as if KING KONG descended on Fifth Avenue and slapped buildings mercilessly, is that there is "NO MONEY OUT THERE". So with less money around, the only game in town for the Banks to survive is to merge. There is just less work left for them to do, because there is less money to manage.
    Reply | Link to Comment