Citigroup Finally Panics

From ClusterStock, Nov. 21, 2008:

Update: Shares of Citigroup taking another hit Friday morning, down below $3 a share.

Also, CNBC's Charlie Gasparino is reporting that Citi CEO Vikram Pandit said in a morning conference call that the company will not sell Smith Barney. According to Gasparino, Pandit said, "Rumor mongering is at the heart of our problems," and he reiterated that Citigroup's capital position is very strong.

Original post:

It took long enough.

In the past week, Citigroup's stock has fallen 50%. During this rout, the company has remained silent: No leaks, no statements, no trial balloons, no nothing. Given that the latest collapse followed a CEO "town hall" designed to give Wall Street some of what it wanted (more cost cuts) and buck up employees (didn't work), the firm apparently figured that silence was golden. Unfortunately, it just made them look asleep.

In any event... Last night, Citi floated several trial balloons into the press:

• It might sell the company
• It might sell pieces of the company
• It won't do either of these things
• The board will have an emergency meeting about the stock price today

The WSJ got the leak about Citi possibly selling pieces of the company or the whole thing. The Times got the leak that this wasn't true. (Citi has a pet project going to discredit the WSJ after the paper said the firm was considering dumping Chairman Win Bisschof, which Citi violently denied. Perhaps the simultaneous leaked info and denials were designed to do this). Both papers got the story about the emergency board meeting today.

The purpose of the "might sell the company" leak, obviously, is to create hope for a takeover premium, which could briefly stop the stock plunge (the stock is up in pre-market). The purpose of the board meeting, meanwhile, is to decide what the company can actually do to stop the stock price from plunging. Unfortunately, the answer is probably "nothing."

Citi's common stock is now worth less than the government pumped into the company last month. (On the bright side, if the government hadn't pumped in the money, it would now be worth zero). The company's tangible book to equity ratio is now more than 50-to-1, and the firm's gigantic mountain of consumer debt "assets" will almost certainly face enough writedowns in the next several quarters to wipe out the equity that's left. (Tangible book value excludes intangible assets and excludes preferred stock: It shows how levered the common equity is).

The company could raise new common equity--another $25 billion, say. That would dilute the common stock by half, but that's better than turning it into a bagel. There would be only one buyer who could come up with $25 billion, though--the U.S. government. And Hank Paulson probably won't take over Citi unless/until he has to.

The company could try to sell pieces of itself, but this will likely take time. The company could merge with Morgan Stanley or Goldman Sachs, but those firms are sinking fast, too. It could try to sell itself to a massive international bank, but it's not obvious why this hypothetical international buyer would pay much for the common stock.

Whatever happens, Citigroup won't declare bankruptcy.  Before that happens, Hank Paulson will take it over, just as he did Fannie and Freddie.  He will then chop it up and start selling off the pieces to try to recoup some of the $2 trillion that taxpayers will be on the hook for. 

Citi's debtholders will probably be kept whole in that scenario (Hank won't risk another Lehman). Citi's preferred shareholders will probably get hit but not vaporized. Citi's common shareholders, meanwhile, will probably get wiped out.

See Also:
Citi: Where't the Panic?
Citi's Balance Sheet: Friday the 13th, Part XVII