Shares of Citigroup fell another 20% today to $3.77 and touched a new low at $3.05. Billed as “too big to fail” Citigroup May Get Government Rescue.
Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said.
Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.
“There is no question that Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”
While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating agencies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt.
“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients today. “In situations where the government has stepped in, the equity holders have not fared well.”
Citigroup CEO Vikram Pandit told employees today that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid.
Citigroup Claims Adequate Capital
Assuming one believes Citigroup has adequate capital, exactly why should the Fed care what its share price is? No one seems to care that Fannie Mae is trading at 30 cents. So, if Citigroup is well capitalized why can’t it just keep lending and otherwise go on its merry way? And if it really does have adequate capital, it would be a screaming buy. Finally, If share price is a concern simply announce a reverse 10-1 split and the stock will be trading at $40 in a jiffy.
So I do not buy this “well capitalized” story and with talks of a rescue it seems no one else does either. Earlier today the board had an unscheduled meeting to discuss the bank’s options. The market was unimpressed as Credit Risk Rose on Citigroup Breakup Speculation.
Balance Sheet Blues
“Investors right now aren’t convinced that we’re done seeing dead bodies on the Citigroup balance sheet,” said William Fitzpatrick, an equity analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn’t own Citigroup shares. “That’s what the sell-off is, concern over more and more losses over the next couple of quarters.”
Concern over its balance sheet is indeed one of the issues. Credibility of Citigroup management is another issue. I discussed both yesterday in Citigroup Blames Short Sellers For Collapse and previously in Citigroup’s Town Hall Meeting.
Citigroup, Under Siege
The New York Times is reporting Citigroup, Under Siege, Holds Talks With U.S.
In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company. Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.
My Comment: A public endorsement? If it comes from Paulson it just may panic everyone.
After a board meeting early Friday morning, Citigroup’s management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of New York, Timothy F. Geithner, who later emerged as President-elect Barack Obama’s choice to be Treasury secretary.
As Citigroup’s stock sank during the day, falling 68 cents to close at $3.87, the Federal Reserve was carefully monitoring how much money corporations and other customers were withdrawing from the bank, people involved in the discussions said.
As Citigroup’s fortunes diminished on Friday, Mr. Pandit, the company’s embattled chief executive, went on the offensive. He worked the phones and held a companywide call to shore up the confidence of anxious employees.
Later in the day, the company held a similar call with large corporate customers. On Sunday, Citigroup plans to run full-page advertisements in major newspapers that acknowledge “our financial markets have been tested in unprecedented ways,” but argue that the company has a broad range of businesses and enough management expertise to pull through. In a nod to the company’s slogan, the text concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”
My Comment: Now there’s a waste of money. If you have to advertise you have no problems, the ad may as well say “We have serious problems” because that is what everyone who reads the ad will know.
One maneuver that Mr. Pandit has championed is for the Securities and Exchange Commission to reinstate the “uptick rule,” which prevents short-sellers from betting against companies whose stock price is falling. Mr. Pandit has been lobbying the S.E.C. for the past week, as have other Wall Street chiefs.
Mr. Pandit and others have suggested that Citigroup is a victim of short-sellers, which some have blamed for speeding the demise of other financial companies this year.
In September, Richard X. Bove, an analyst at Ladenburg Thalmann, predicted that short-sellers would turn their attention to larger and larger financial companies, including Citigroup, which he said at the time was strong enough to withstand the pressure. “They’re going to hit a company that is too well grounded, too well capitalized, and I think that will be Citigroup,” he said.
My Comment: Pandit and Bove are both fools if they think short selling has anything to do with Citigroup’s woes. Short interest is a mere 2.7%.
“The reason you have to ‘save’ Citibank is you cannot allow this hysteria,” said Peter J. Solomon, chairman of the Peter J. Solomon Company, a small investment bank.
My Comment: Add Peter J. Solomon to the ever growing list of clowns who think that failing companies need to be bailed out.
“If there’s a flight from Citi’s stock, that’s unfortunate, but I don’t think that’s the government’s business,” said David M. Walker, the president of the Peter G. Peterson Foundation and a former United States comptroller general.
David Walker and Ron Paul are among the very few in government positions or recently out of government positions who have a clue as to the complete fiscal insanity that is wrecking our nation.
Timothy Geithner, president of the New York Federal Reserve and Obama’s Choice For Treasury Secretary has been involved in the meetings with Citigroup. Unfortunately Geithner is just another Keynesian clown who thinks that problems can be solved by throwing money at them. I am very disappointed in Obama’s choice.
With that in mind, let’s see what the weekend brings in regards to Citigroup.
Mike “Mish” Shedlock
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