Tuesday, November 18, 2008

Citi Falls!

Citigroup announced that it was cutting 50,000 jobs, crashed and promptly took most of the world down with it as Japan became the newest arrival to the recession household.

Most world
stock markets
fell Monday after Citigroup Inc. said it would cut another 53,000
jobs around the world to deal with the fallout from the financial crisis.
Asian shares were steady earlier.

The latest bout of jitters were stoked
by the announcement from Citigroup, which had already cut around 23,000 jobs
this year. The banking giant, which lost around $20 billion last year, saw its
share price 6.6 percent on the news.

Analysts said Citigroup's job-cutting would likely be followed by
many more leading companies as they grapple with the sharp global
economic slowdown
and that as a result it remains very difficult to call
a bottom in stock markets. Japan
became the latest country to enter an official recession, government figures
showed Monday.

The bank staggered from its dismal third quarter earnings report on October 16, then filed a 10- Q on the 31 which stated that it was taking a $1.4 billion bite from credit card securitizations. After making all the appropriate gestures and statements about "managing risk" it then showed the disdain for risk management that brought it to this point and the disdain for the truth.

From the Citigroup 10-Q filed with the SEC on Oct 31st (hat tip Ray):

In the third quarters of 2008 and 2007, the Company recorded net gains (losses) from securitization of credit card receivables of ($1,443) million and $169 million, and ($1,398) million and $747 million during the first nine months of 2008 and 2007, respectively.

And Citigroup on Credit Reserves: The $2.3 billion build in North America Consumer primarily reflected a weakening of leading credit indicators, including higher delinquencies on first mortgages, unsecured personal loans, credit cards and auto loans. Reserves also increased due to trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment rates.
As the environment for consumer credit continues to deteriorate, the Company has taken many actions to manage risks such as tightening underwriting criteria and reducing credit lines. However, credit card losses may continue to rise well into 2009, and it is possible that the Company's loss rates may exceed their historical peaks.

But then without skipping a beat Citi joined the ranks of the newly enhanced loan modification programs. Those scams that recklessly re-leverage the home owner at the alter of continued payment streams however temporary to the bank.

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ’save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

But it is not only the borrowers who are terribly leveraged, misery as it is loves company and Citigroup is a miserably leveraged company.

There are plenty of slides talking about “Tier 1 Capital” and such. I never
understood those ratios and don’t think they’ll be worth much in a panic
situation as banks lose access to hard funding sources like consumer deposits.
Using Citi’s Tier 1 Capital ratio of 10.4% would imply a leverage ratio of
100/10.4 = 9.6x.

The reality is, intangible assets like deferred tax assets should NOT be included when calculating leverage ratios...
Now consider Citigroup. It has $2.05 trillion of assets listed
on its balance sheet. That includes $63 billion of “goodwill and intangibles,” worthless assets like Fannie’s DTAs. Contrast this with the company’s equity of $151 billion, which would include $25 billion from TARP. That implies a leverage ratio of 14x, not 10x as the bank would have you believe when it publishes its “Tier 1″ capital ratio. Remove goodwill and intangibles from assets and quality and you have a true leverage ratio of 23x. = ($2.05 trillion - $63 billion) / ($151 billion - $63 billion). That’s roughly the same calculation we did to get to Fannie’s true leverage ratio of 100x.

By the way, I’m giving Citi credit for the $164 billion of “other assets” on the balance sheet as well as $19 billion of assets of “discontinued operations” held for sale. These sound pretty squishy too…

And now for the scary part. Citi’s $2.05 trillion of assets are just “on-book” assets. They have $1.6 trillion of credit commitments and $1.3 trillion of “off-balance” sheet commitments to boot.

You get the idea now, that a hippcup can wipe out the banks entire equity. For a massive bank like Citigroup to have it's equity a breath away from oblivion is to be on the death watch list and the talk of that in polite circles is getting louder as it's share price dips into single digits.

"Of the big banks, Citi is the sickest dog," Howell said.

Of the big four U.S. banks, a group that also includes JPMorgan Chase & Co., Bank of America and Wells Fargo & Co., Citi is the only one that has not made a recent major acquisition — which analysts say is one of the few chances for growth right now. Citi is also the only big bank left that has posted four straight quarterly losses.

In a research note Monday, Buckingham Research analyst James Mitchell wrote that the "the recent bout of expense cuts can get the company's expense levels in line with its peers." But he added that Citigroup has much greater exposure to total risky assets, more than double its peers.

And so Citi is left to do all that it can, cannibalize itself and cut heads, but as Wa Mu and Lehman Brothers and others have found in the desperate struggle to survive tunnel vision on that which you can control blinds you to the things you cannot which for Citgroup is revenue. And for all the cost cutting this company would gladly trade any dollar saved for a penny earned.

But the bank sold out it's earning of tomorrow as the credit bubble expanded yesterday and just like deeds done in anger that can never be undone only forever regretted, the earning that would have been will now never be nor will the sun rise on Citigroups tomorrow as it is quikckly setting today.

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