Citigroup in turmoil


The bank’s board meets as Wall Street debates whether CEO Pandit can withstand the pressure, or if he’ll be forced to accept a deal, or a bailout from the US government.

Citigroup shares continued their incredible decline during the session on Friday, November 21, despite a general market rally, indicating that there is not much time left for CEO Vikram Pandit.
Pandit continues to fight with all its might to restore confidence in the market. He said he has no intention of breaking up the World Bank and has enough capital to weather a severe consumer downturn. But the stock’s closing price was 3.77, representing a further 20% decline from 4.71 the previous day to November 20. Speculation has continued to grow that he will have little choice but to hand over the bank to government control.

A decline in Citi’s market capitalization means the bank faces extreme difficulty both in its ability to raise capital and in reselling it in the market. “When a company experiences a decline in its stock price of this magnitude and depth, it is a signal that the company is going bankrupt. “, explains Martin Weiss, founder of Weiss Research. “The stock price provides the best indicator. It’s the ‘canary in the coal mine’. Weiss

says it’s now up to the Treasury Department and the Federal Reserve to determine whether they want nationalization for Citigroup, a la Fannie Mae and Freddie Mac. “Someone is going to have to step up and say, ‘Enough’. »

If Citi demanded a government bailout, it would be by far the biggest bank failure in history. Citi holds $2 trillion in assets, about six times more than Washington Mutual’s and three times more than Wachovia’s.

The tragedy of derivatives

Furthermore, the prospect of failure by Citi poses far more challenges for regulators, due to its huge wealth in derivatives. These derivatives essentially represent, for the most part, bets on interest rates, currencies, and other markets, as well as bets on the probability of payment defaults by other large companies (credit default swaps). By mid-year – June 30, 2008 – the Office of the Comptroller of the Currency (OCC) claims that the bank’s main unit, Citibank NA, held a total nominal value of 37.1 trillion dollars in derivatives, including 3.6 trillion dollars for credit default swaps. These swaps, which over the past few months have proven to be the most dangerous product category. In contrast, Wachovia Bank,

Although the theoretical value overestimates the true market risk of derivatives, another often underestimated risk is the exposure of the bank to the possibility that some of its trading partners, in the face of their transactions, could default on them. For every dollar of venture capital, Citibank was, as of June 30, exposed to $2.58 in such credit risk, according to the OCC. By contrast, Wachovia’s exposure was 52.7 cents to the dollar, only about one-fifth of Citi’s as a proportion of capital.

Not everyone has lost hope. Mike Mayo, financial analyst at Deutsche Bank, published a note on November 21, explaining that Citigroup still has a fundamental value justifying a target price of 9 dollars. He estimates that Citi has $100 billion in funds to cover its estimated $50 billion losses.

At a meeting on November 17, Pandit warned the market that losses for the bank’s consumer loan portfolio could amount to $1 billion to $2 billion every quarter from now on from the first. next year’s semester – numbers much lower than Mayo’s. But the market was hit harder by what Pandit didn’t say: The bank categorized some $80 billion in bad assets as “investment securities,” a subjective accounting category that allows the bank to shelve risky and hard-to-value assets in the hope of a recovery.

The partner of the eleventh hour?

Many doubt that these assets will be recovered and believe that they will eventually deal another blow to the bank’s balance sheet. Stuart Plesser, an analyst with Standard & Poor’s, says investors are suspiciously watching these assets and assuming they are undervalued.

Some Wall Street analysts are still floating the idea that Citi could find an 11th-hour business partner. Goldman Sachs, Morgan Stanley, and even American Express – previously a dream acquisition of Citi founder Sanford Weill – have been mooted as potential suitors. The others are still cautious about the timing: “I don’t believe there is any other financial institution in the world today that has the capital or is crazy enough to take over Citigroup. says Weiss.

Pandit, the board, and other Citi executives met very early last Friday. But with the wind of panic in the market, their choices have narrowed.

“We’re racing in a different ball game; which brings us to a game where no one trusts each other. “, explains Plesser. “We’re talking about the fear of institutional business partners, which would lead to fewer deposits and customers in the wealth management business, which would take away the value of that business. If this happens, we need to have a plan to sell before it loses value. At such levels, it is beyond their control. »

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