Monday November 24, 2008
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Citigroup (C) which seen its shares decimated along with just about every other stock, saw an acceleration of the decline in its shares last week, as Wall Street turned its negative focus on the company.

The shares traded as high as $10.11 exactly a week ago, but by Friday, they were down to $3.77 after hitting an intra-day low of $3.05.

With Citigroup being just about the largest bank in the world in terms of footprint, obviously no longer on a market cap basis, it was automatically assumed that the government would step in to help rebuild confidence in the company. And since as with other bank rescue plans, they’ve done it over the weekend before the markets opened on Monday, it was expected that we would get news this weekend with regards to Citigroup as well. They’ve delivered.

In an agreement between Citigroup, the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation, the government will invest $20 billion in Citigroup, with the money coming from the TARP program which was set up to help financial companies weather the financial crisis.

Also, the Treasury and the FDIC will provide protection against the possibility of unusually large losses on Citigroup’s asset pool of about $306 billion of loans and securities that are backed by residential and commercial real estate. These will remain on Citigroup’s balance sheet along with the continued anticipated cash flows from these assets.

In addition, if it becomes necessary, the Federal Reserve stands ready to backstop additional risks in the asset pool through a non-recourse loan.

Citigroup will assume any losses on the portfolio up to $29 billion on a pre-tax basis, in addition to Citigroup’s existing reserves; the government entities will assume 90% of any losses above that level and Citigroup will assume the balance.
In return for the government support, Citigroup will issue $7 billion in preferred stock to the government, paying 8% in annual dividends. Citigroup will also issue warrants to the to the government for of roughly 254 million shares of the company’s common stock that will have a strike of $10.61. Citigroup also agreed not a pay a quarterly dividend that exceeds $0.01 per share for three years starting with the next quarterly common stock dividend payment.

In addition to the $20 billion cash raised from the government, Citigroup is also claiming the following increased capital benefits: $3.5 billion, the portion of the $7 billion of preferred stock fee recognized for capital purposes and an improvement of $16 billion in its capital position as a result of the asset guarantee.

Tags: Citigroup

Wachovia (WB) has ended merger talks with Citigroup (C) and Wells Fargo (WFC) has now made an offer for the company. Should the merger go through, Wachovia (WB) shareholders will receive .1991 shares of Wells Fargo (WFC) for each Wachovia (WB) share they own. Using Wells Fargo’s (WFC) closing price of $35.16 on Tursday 10/02/08, the offer is valued at $7 per share or $15.1 billion. Wachovia (WB) shares closed at $3.91.

Tags: Wachovia  Wells Fargo  Citigroup

With the Dow dropping a historical 777.68 points yesterday because the house voted to reject the bailout plan, we may see lawmakers going into overdrive and working on trying once again, to get the bill passed as early as today.

Initially, it was believed it would take at least a couple days for lawmakers to address the situation again, as Monday evening was the start of the Jewish holiday Rosh Hashanah, which lasts for two days.

However even those lawmakers who were skeptical that the markets would see a precipitous drop if the bill was not passed, now understand that the economy is in a free fall, we need some sort of brakes applied and they need to act quickly.

On Monday 09/29/08, Citigroup (C) bought the assets of Wachovia Bank (WB) in a fire sale. While Vikram Pandit, Citigroup’s (C) CEO, extolled the deal in a press conference, which considering that they picked up $700 billion worth of assets for $2.2 billion (they immediately wrote down about $30 billion of those assets) it does seem to be, you still have to wonder how much prodding they got from the government.

In other words, this was a rescue plan albeit from the private sector, that was done to “prevent” the failure of another very large bank just four days after Washington Mutual (WM) became the largest ($307 billion in assets) U.S. bank to fail after it went under on Thursday 09/25/08.

And with the bank failures now getting larger in scope and happening more frequently and the FDIC having only $45 billion in the insurance fund that covers deposits (up to $100,000 per account) in federally regulated banks, it won’t take much for the fund to get wiped out and the FDIC will have to go hat in hand to congress.

Today, on the economic news front, we will be getting Chicago PMI, which measures manufacturing activity in that region, for September, as well as Consumer Confidence, again for September.

The numbers will be bad needless to say and the fragile state of the economy will continue to be a topic of discussion, especially now that we can add major bank failures to the discussion.

From a trading perspective, unless we get a technical bounce and there is a big rebound in stocks today, there will be little buying and until the bailout package gets passed, its possible we won’t see any meaningful rise in stocks. So the trading plan for today is to gauge market direction, trade according, that is go with the flow and take early profits.

Sitting on your assets today, is not a bad course of action and we would recommend getting in only on one of two conditions, if it looks like we will get either a big move in stocks, in which case you short if we are heading down, or you go long if we are getting a bounce, or congress will be voting today on the package, in which case, you go long.

Other than that, watch for what lawmakers are doing, and on the day we will be getting a vote, go long the markets by trading indices and ETFs that track the market, or buy call options on those instruments.

If we do get that bailout rally, look to lock in your profits within two to three days. The fundamentals of the economy are horrible and earnings season is around the corner to remind us of that. So stocks should be heading down further.

 Tags: Citigroup  Wachovia  Bailout Plan

In a deal that was facilitated by the government’s Federal Deposit Insurance Corporation, Citigroup (C) will acquire the banking operations of Wachovia (WB). Citigroup (C) will be paying $2.2 billion in stock for Wachovia’s (WB) assets.

According to the FDIC, the details of the deal are that “Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.”

Perhaps in a bid to avoid a panic situation as another bank goes under, the FDIC is making it a focus to point out that “Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.”

Wachovia, which was one of the largest banks in the country, is the latest victim of the credit crisis. In a bid to grow into a money center bank with a national footprint that could offer every retail financial product to just about everyone, the bank went on an acquisition spree.

Amongst its purchases, was one of California’s largest mortgage lenders, Golden West Financial. Wachovia (WB) paid $24 billion for Golden West in May of 2006, at what turned out to be exactly the peak of the housing market. With the downturn in the housing market, and California being one of the hardest hit states, those mortgage assets, have led to Wachovia’s undoing.

Wachovia’s stock which closed on Friday 09/26/08 at $10, are indicated to open around $0.75.

Tags: Wachovia  Citigroup  Bank Failure

Already struggling Wall Street firms, which are currently faced with billions in losses as a result of the current credit crisis, now have to contend with and account for a not entirely new problem, auction-rate securities or ARS. Auction rate securities are long term debt issued by corporations and municipalities, with a unique interest rate structure that are or were supposed to be reset every week or month, in auctions. That market which at it’s peak, was a $340 billion market, has evaporated, causing the securities to become illiquid, and leaving the banks that issued them potentially liable for billions.

On Thursday 08/07/08, in a settlement agreement with the New York State Attorney General, the Securities and Exchange Commission, and other state regulatory agencies, Citigroup (C) announced that it will offer to buy back at par, auction-rate securities that are currently not auctioning, from all Citigroup (C) individual investors, small institutions, and charities that bought auction-rate securities from the bank before 02/11/ 2008.

The difference between the par price that Citigroup (C) will pay and the “current” market value of the ARS securities,  is being estimated at $500 million. However, to the extent that the ARS market is now very illiquid, with very little demand for them, as well as the fact that more banks will most likely have to follow Citigroup’s (C) lead, creating a situation where there will be a whole lot more of these auction-rate securities on the banks’ balance sheet that they will want to get rid of but with a paucity of buyers, we will probably see another situation like that of collateralized debt obligations or CDOs that the banks have on the books that they have had to keep marking down and for which Merrill Lynch just set a pricing precedent by selling them for $0.22 per dollar of face value.    

As a result, how much of an actual loss to Citigroup (C) this will cost, depends on how much it will be able to get for them in an actual disposition sale. Furthermore, as specified in the agreement, Citigroup’s purchase seems to cover only small investors that would be considered unsophisticated. However, there are also big corporate clients, some of whom currently hold hundreds of millions of dollars of ARS and they certainly will want their money back as well. Some have already filed suit against other issuing banks.

Thursday evening, in following Citigroup’s (C) lead, Merrill Lynch (MER) also announced that it will start buying back in January 2009, the $30 billion in auction-rate securities that its retail clients hold. 

The ARS situation seems to have come to a head this week, as states such as Massachusetts and New York filed suit against several issuing banks for fraudulently marketing auction-rate securities as being very liquid or same as cash, which as being proven now, they are apparently not. Several other states are considering filing their own lawsuits.

Most of the big money center banks and Wall Street firms are exposed to potential losses from auction-rate securities and these auction-rate securities are obviously the next chapter in the credit crisis story. 

Tags: auction rate securities, citigroup, merrill lynch

Stocks posted their biggest one day advance in four months, in a broad based rally that had all three major indices climbing sharply. The Dow added 331.62 points (2.9%), closing at 11615.77, the S&P 500 rose 35.87 (2.9%) to close at 1284.8, while the tech laden Nasdaq rose 2.8% or 64.27 to close at 2349.83.

The rally stared right at the open, on falling crude oil prices and then in the afternoon, after details of The FOMC meeting were released, stocks added to an already triple digit rally.

Of the thirty Dow stocks, all but Chevron (CVX) helped the DOW advance today, with AIG (AIG) posting the biggest percentage gain, closing up 11.99%, to close at $29.89. Some of the other big movers in the Dow included Boeing (BA) for 6.2%, Proctor and Gamble (PG) for 3.27% and Walmart (WMT) for 3.27%

Citigroup (C) which has seen its shares lose about 36% of their value this year as a result of the subprime crisis, is now beginning to see problems in its credit card portfolio.

The bank, which is the nation’s largest credit card issuer, in a recent SEC filing, reported that it lost one hundred and seventy six million dollars from securitizing its credit card loans. In the filing, the bank reported that it was not able to securitize as much of its credit card portfolio as it would like and additionally, it was forced to write down nine billion dollars worth of securitized credit card debt that it currently holds.

This was the first loss in three years that the bank experienced while trying to securitize credit card debt and with the economy getting weaker and weaker, resulting in more financial pressure on the consumer, Citigroup (C) and other credit card issuers will continue to see mounting problems with their credit card business.

With financial stocks having run up again last week, traders might be able to undertake profitable trades shorting them.

 
CitigroupCitigroup stock
 

Citigroup today reported earnings that were”good” enough  to allay Wall Street’s fear about the bank’s condition and the stock is currently up $1.53. The bank only lost $2.2 billion in the quarter or $0.49 per share. Revenues declined 49% to $18.65 billion.

This was in an environment where  write-downs on credit losses totalled $11.7 billion and total assets under management fell. When a Wall Street firm announces a write down and a very short term later Wall Street is reporting they’ll announce another write-down, it would seem from a cursory glance that some financial intitutions have controlled how much write-downs they’ll claim for the quarter instead of just taking it all in one fell swoop. Should we wonder if they are tempering their losses as well?

Bank of America reports next week and if they come out with positive earnings, one would really have to wonder.

Yesterday at this time, stocks were turning around to tack on a gain of over 150 points on the day. Its a mirror image today. We are now down 152.82 points. The losses are across the board as all three major indices, Dow, Nasdaq and S&P 500 are all off over 1.3% on the day.

Financials are leading stocks downward, as they give back some or all of the incredible gains that put up yesterday.

MER	Merrill Lynch	30.64	2.13	6.50%	17,198,878
LEH	Lehman	20.51	1.76	7.90%	28,976,005
GS	Goldman Sachs	170.87	4.03	2.30%	9,308,586
FNM	Fannie Mae	15.88	1.74	9.88%	34,479,770
FRE	Freddie Mac	10.99	2.47	18.35%	38,964,384
AIG	AIG	26.72	0.68	2.48%	13,619,952
C	Citigroup	16.74	0.65	3.74%	68,702,601

 (MER), (GS), (AIG), (C), (FNM), (FRE)

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