What is Citigroup, Inc. Worth Now?

Well, here we go........

Citi has a stated book value of a little over $80 billion. I discounted this by 50% because:

- I see no relief in the housing market and mortgage related assets will continue to be marked down

- Any quality assets that Citi owns will be discounted as they are forced to divest

- The stock market is telling us that a significant discount is warranted

Using $7.35 book value per share and modest return on equity projections, I come up with a share price of $2.34 for Citi.

Assuming that this government tender offer is maximized, shareholders would be greatly diluted. There is potential for a 36% government stake in the company. Using the maximum scenario, the dilution brings the share price to $1.73 per share. The stock closed at $1.50 yesterday, so the market did a pretty good job of clearing.

How did this happen to such a large company? Company size does not serve as a defence against arrogance and profligacy. As long as profits and earnings multiples expanded, few managers cared to look under the hood. Whole loan inventory, CDO inventory, balance sheet guarantees embedded in CDOs, short optionality and leverage to not mix well with an under-involved staff.

Failure Friday: #s 15 & 16 of 2009

Two more banks shuttered today, both of which were at the top of the revised (12/31/08 data) Bad Banks list.

Goodwill Update

Back on 1/23/09, I posted a similar list of banks that held a considerable amount of goodwill. The list here is updated with the most recent financial numbers and includes banks with over $10 billion in assets.

GDP Update

The Bureau of Economic Analysis releases a series of three reports when estimating quarterly GDP:

- Advance

- Preliminary

- Final

Each subsequent report, in theory, provides a better estimate of production than the previous one. Today, the preliminary report for 4th Q 2008 was released. The report estimated a 6.2% DROP in GDP, the advance report contained an estimate of -3.8%. The durable goods component dropped a whopping 22.1% (annualized rate) in the quarter.

Real GDP is now back to mid 2007 levels. I still think that the economy will shrink to 2005 levels, so we have experienced 20% - 25% of the pain so far.....

Debt of the General Fund

Our nation's debt is piling on quickly. Since our economy is essentially based on debt and front loading consumption, the debt deflation that I believe we are experiencing is causing a significant economic contraction. The growth rate of our economy and the corresponding expansion of the money supply was fostered by securitization and moral hazard. The solution that the Federal Government is offering to us is to replace the destroyed debt with new, Government debt. Great, but this is debt that the taxpayers will have to carry anyway. It is not a solution. Take a look at what fiscal 2009 is shaping up like:





I am estimating that total Treasury securities outstanding will close in on $12 trillion by September, 2009. Using a guess of 2% GDP growth, the debt to GDP ratio of the U.S. will jump to over 78.2%. For each dollar of debt added, GDP will climb only 19 cents.

U.S. Auto Makers: Can You Spare a Billion?

GM is lobbying DC for another $16 billion or so to stay alive. These auto makers have not proven to the market that they can survive. Their combined stock market capitalization is $6.2 billion. The prospect of more Americans losing their jobs is far from music to my ears, but I can't stomach more of MY MONEY being dumped into zombie corporations.

The FDIC is a Joke

The FDIC released its Quarterly Banking Profile for the 4th Q of 2008 today:

The Deposit Insurance Fund has dwindled down to $18.9 billion.  Insured deposits total $4.8 trillion, so the reserve ratio is only 0.40% (WOW!).  Obviously, one significant bank failure can wipe out the rest of the fund.  This is why their credit line with the Treasury Department is so important.  By the way, the Treasury only borrows money since it is operating a budget deficit.  That means any draw on the credit line will have to be paid for by issuing Treasury securities.  YOU ARE INSURING YOUR OWN DEPOSITS AMERICA !!!!!!!!!!!!!!  The Fund has dropped by about $34 billion since the beginning of the 2nd Q of 2008.  Meanwhile, by some measures, deposit growth is occurring at its fastest clip in 10 years.

2008 ended with 25 bank failures, 5 assistance transactions and 252 "problem" institutions.  The identities of these "problem institutions" are never revealed by the FDIC, but I think that our Bad Banks list is a good proxy.  The assets of the problem children hit $159 billion.  So, if 11.89% of those problem assets go bust, the insurance fund is toast.

The Temporary Liquidity Guarantee Program (TLGP) backed $224 billion in corporate debt at year end 2008.  This program provides guarantees on the debt issued by bank holding companies (debt must meet certain criteria, maturity, etc.).  The FDIC collects a fee from the issuer for providing the guarantee.  The tally for 2008 was $3.44 billion.  Hmmm, 1.54% of the guaranteed principal up front.  I guess that looks good when you compare it to the Deposit Insurance Fund.

As for the banks themselves, they lost a combined $26.2 billion in the 4th quarter.  That was the worst quarterly performance in over 21 years.  Of note:

- goodwill & other intangibles dropped by $54 billion

- loans & leases 30-89 days past due increased by $36.9 billion

- non-current loans & leases increased by $44.1 billion

Weekly Unemployment Claims

Jobs data....not so good.

Weekly claims continue to rise: 667,000

Continuing claims: 5,112,000

Once again, even on a relative basis, claims data is poor: 3.8% of covered are filing claims

More on Housing: Existing Home Sales

Not good........

Sales fell to an annualized rate of 4.49 million homes, an 11 year low. Distressed properties accounted for 45% of the volume.





I put the above graph together to illustrate the price declines that are needed to reduce inventory. The last 13 months of data is included. The X axis tracks the amount of months it would take to eliminate the inventory of existing homes (at the current sales pace). The Y axis is the average U.S. home price. The black line is a regression trend line.

The average inventory for the last year or so is 10.4 months. According to the most recent report, inventory has dropped to 9.4 months. Good, right? Well take a look at where prices had to fall to in order to achieve an inventory number that is a bit better than average. We are not out of the woods.

Foreclosure Data

Courtesy of RealtyTrac, Inc.

TARP Recipients: Update

Please click to expand. They are building a lead on ExxonMobil ($367 billion).

Credit Default Swaps

Credit default swaps (CDS) are contracts that allow for the transfer of credit risk. For example, let's say that a pension fund manager owned several million dollars worth of XYZ Corporation bonds. The manager thinks that the company may hit a rough patch and there is a risk that the company may not be able to pay off its debts. The manager could enter into a credit default swap in which he/she would pay a fixed amount of money to the seller in return for downside protection. If XYZ Corp. did indeed default, the manger's bonds would be worth much less, but the credit default swap would make up for most of the slide.

Of course, much like any useful tool, CDS can be mismanaged and lead to large losses. We will leave that for another discussion, for this post I want to focus on the current market for protection.



The above graph represent today's closing prices for protection on residential asset backed securities. The lower the price, the more expensive the protection. The indices are grouped by loan quality and securitization date (vintage). As you would expect, the higher rated indices are trading at higher prices. What is noteworthy is that 8 of the indices hit new lows today, indicating that risk appetite is weak.




The second graph represents prices for commercial mortgage backed securities. These indices work in the opposite fashion, the higher the level, the more expensive the protection. Three of these indices hit new highs today.

Although these prices are not perfect indicators of asset quality, they are some of the only resources available to market watchers. After all, there is only one bid.....the Federal Government.

Home Prices: Case / Shiller Indicies

In previous posts, I have mentioned (along with others in the industry, what is right is right) that the economy doesn't have any chance of recovery until home prices bottom. The home equity ATM is gone and the wealth effect has similarly dissolved. The later is important because it supported a low savings rate; why scrimp if my house is always moving higher? Not to mention multiple dwelling purchases and subsequent defaults by speculators, which have decimated states like Arizona, Florida and Nevada.

The data released today does not point to a bottom. On average, prices are down 19% in the last 12 months. The last time prices were this low was the Winter of 2003.

More on Leverage

When I go to Las Vegas, I budget a certain amount of money to gamble with. I usually don't place one bet with all of the budgeted funds and I certainly DO NOT expect the casino to give me a "do-over" if I bet on red and the roulette ball lands on black........



The above graph (click to expand) summarizes the last few years leading up to the current debacle. I took the year end total assets of the selected firms and divided that number by the common shareholder's equity. By 2007, 30 to 1 (meaning that the firm held $30 in assets per $1 in equity, the other $29 was debt) was the norm. This means that A 3% LOSS ON TOTAL ASSETS ELIMINATES THE SHAREHOLDER'S EQUITY.

Late Update: 14th Bank Failure in 2009

Silver Falls Bank was closed last Friday, the only one the FDIC got around to shuttering. The bank was on the Bad Bank list and the loss percentage was sizable.

The Bad Bank list basically measures loans that are either significantly delinquent or in such bad shape that the bank isn't even counting the interest any more (non-accrual), relative to Tier 1 capital and loan loss reserves.

Remember, banks are roughly levered $10 to $1. A 10% loss on assets wipes these institutions out.

Bank Stocks Crater

Another terrible trading session for bank stocks today. The above table lists 55 bank holding companies that received TARP funds of at least $200 million. The total stock market capitalization of those companies is a little over $368 billion. The stock market capitalization of ExxonMobil is a hair over $359 billion. Would you want virtually the entire banking system or a whole bunch of oil?

Last Sunday, I indicated that equity prices had some considerable room to fall. Please be cautious. Some companies that may seem like good prospects could have hidden pitfalls. For example, H&R Block owns a bank that has a rising number of bad loans. You may remember that the company lends people money based on anticipated tax refunds. Not only have their defaults risen, but there is a danger that they might discover a considerable amount of fraudulent loans. Almost two years ago, Pacific Capital Bancorp was forced to take a significant amount of losses because customers had presented false income and tax documents to qualify for loans.

http://www.forbes.com/2007/10/30/pacific-capital-closer-markets-equities-cx_cg_1030markets50_print.html

S&P 500 Earnings ReDux

This past Friday, the senior index analyst at Standard & Poor's (S&P) released a statement regarding equity earnings. Not only would the 4th quarter of 2008 mark the sixth consecutive quarter of falling earnings for the S&P 500, but it would be the FIRST NEGATIVE EARNINGS QUARTER EVER. In other words, the index as a whole posted a quarterly loss. In addition, they are forecasting another quarter of declining earnings. This seventh consecutive quarter would become the worst streak in the index's history.

This has prompted another look at equity index levels:

My guess, 2009 earning for the S&P 500: $31.70

Average earnings yield for the S&P 500: 4.882%

S&P 500 Index level: 649.18

Dow Jones approximate equivalent: 6,200

This is a substantial drop from current levels: 827 and 7,850 respectively. Might they fall that much? Maybe, but the important thing here is not jump into the equity market without thinking about the earnings prospects of these companies. As I have mentioned in previous posts, GDP will have to fall dramatically to clear the credit market. We are not out of the woods yet.

Please click on the below graph to expand.

Another Late Day Bank Closure

The closing of Pinnacle Bank up in Beaverton, Oregon brings today's total to 4.

Really small bank, $73 million in total assets, estimated loss to the FDIC is $12.1 million.

Failure Friday: Another 3 Bite the Dust

The FDIC seems reluctant to close more than 3 banks per Friday. At this rate, I think that they will be closing banks for another 14 months.

Please click on the tables to expand.

Obama's Bare Cabinet

2/12/09 - New Hampshire Governor Mr. Judd Gregg withdraws his name from consideration for the post of Secretary of Commerce (does anybody want this job?). Fun Fact: Gregg won $850,000 in 2005, he bought $20 in PowerBall lottery tickets

2/3/09 - U.S. Senator (South Dakota) Mr. Thomas Daschle withdraws his name from consideration for the post of Secretary of the Department of Health & Human Services. Fun Fact: Aside from not liking to report income to the Internal Revenue Service, he became the nation's 1,776th senator when he was first elected in 1986.

2/3/09 - McKinsey & Co. partner Ms. Nancy Killefer withdraws her name from consideration for the post of Chief Performance Officer. Fun Fact: Aside from not liking to pay state unemployment tax, she was once a member of the IRS Oversight Board.

1/4/09 - New Mexico Governor Mr. William Richardson withdraws his name form consideration for the post of Secretary of Commerce. Fun Fact: Aside from allegedly handing out state contracts to those who donate to his political campaigns, he supported a state ban on cockfighting. In 2007, New Mexico became the 49th state to ban the contests (Louisiana followed in 2008).

Note: Despite failing to pay over $30,000 in federal taxes, Mr. Timothy Geithner was confirmed as the 75th Secretary of the Treasury. Fun Fact: Aside from not abiding by the rules set forth by the Department of the Treasury, he worked for Kissinger & Associates for 3 years and is a member of the Council on Foreign Relations.

Bankruptcy Review: YIKES !!!

Bankruptcy news abound today:

Filing - Charter Communications: majority owner is Paul Allen of Microsoft fame

Filing - Midway Games: famous for Mortal Kombat

Rumor - Sirius XM Satellite Radio considering filing: home of Howard Stern & Oprah

Update - Lyondell CDS/LCDS results from last week: 15.5 cents & 20.75 cents respectively (Lyondell debt is only worth 15.5 cents on the dollar or 20.75 cents on the dollar, depending on the type of borrowing)

There are 2 charts above, please click to expand.

Another Voice of Reason

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoc1E2sKjADk&refer=home

“The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable,” the strategist wrote. “The latest Treasury program is simply another attempt to stymie the consolidation process.”

This analyst is right on target.

Primary Dealer Holdings: Interesting Stuff

First, the list of primary dealers (those authorized to trade directly with the Federal Reserve):

BNP Paribas Securities Corp.		Goldman, Sachs & Co.
Banc of America Securities LLC*		Greenwich Capital Markets, Inc.
Barclays Capital Inc.		HSBC Securities (USA) Inc.
Cantor Fitzgerald & Co.		J. P. Morgan Securities Inc.
Citigroup Global Markets Inc.		Merrill Lynch Government Securities Inc.*
Credit Suisse Securities (USA) LLC		Mizuho Securities USA Inc.
Daiwa Securities America Inc.		Morgan Stanley & Co. Incorporated
Deutsche Bank Securities Inc.		UBS Securities LLC.
Dresdner Kleinwort Securities LLC
*It is anticipated that the two primary dealers will merge sometime in the first quarter of 2009. The below graph highlights the dramatic change in risk profile for these dealers.  They have abandoned corporate debt, making it difficult for businesses to refinance and keep workers employed.  Their appetite for insured product has stabilized.  The most interesting component is the Treasury position.  Often, a dealer will hedge overall interest rate risk of a bond they are long by shorting a Treasury issue.  This protects the dealer against overall increases in interest rates.  Of course, the dealer is still subject to the credit risk component of the bond they are long. Basically, dealers are now flat Treasuries, implying that they are betting that the overall direction of rates will be lower.  Perhaps they became tired of losing on these short positions as Treasuries rallied because of the poor economic scenario.  Either way, they are quite vulnerable to rates moving higher.  Unintended consequences indeed.

Fun With Numbers

Please click on the above table to expand.

- The stock market capitalization of the 4 largest bank holding companies totals about $214 billion

- The stock market capitalization of Google, Inc. is $113 billion

- The KBW Bank Index closed at 26.74 today

- The last time the Index traded around that level was January, 1995

I Must Give the Markets Some Credit...

The equity market shed about 4% today based on the milquetoast presentation from our new Secretary of the Treasury. Geithner's plan lacks clarity, vision and the tolerance for pain that the true solution requires, the solution being nationalization of the banking system.

It really is this simple: the banking system borrowed lots o' money and lost its bet. if a bank is levered 10 to 1, a 10% loan loss will cause it to collapse. Several institutions were levered 20 to 1, even 40 to 1. All that is left is to do the math. CDOs mimicked this levered profile in a nice, neat package for other types of accounts to buy.

The destruction of credit is painful, but the only cure. Bailing banks out only promotes retrenchment. Think about real GDP back at the year 2000 levels before any type of credit equilibrium is attained.

The fact that the government wants to foolishly maintain any stock market capitalization for these companies is a farce. Shareholders were the ones who reaped the outsized rewards, they should be the ones to suffer the pain. The taxpayer is the lone sucker in this, stuck with the bills.

This is eerily similar to the strategy that Japan followed years ago. They waited about 5 years before they finally gave in and forced banks to merge en masse or fold. Those 5 years cost their economy 20 years worth of expansion.

Late Night Bank Closing

One more: County Bank in Merced, CA was closed yesterday.  It was on the bad bank list.

The FDIC estimates that it will drain the Deposit Insurance Fund by $135 million.

Can They Do It?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.yAFsg.Y5kU


In private conversations and blog posts, I've mentioned execution risk. It is not enough to have a good plan (not that the government has that or anything), implementation is just as important.

2 More Banks Take a Powder

Alliance Bank (Culver City, CA) and FirstBank Financial Services (McDonough, GA) were shuttered by the FDIC today. The 2009 total is now 8 closed banks. Both institutions were on the bad bank list.

Earlier this week, the Chief Operating Officer of the FDIC mentioned these tidbits:

- TLGP backed debt totaled $221 billion as of 1/28/09

- the FDIC suggested increasing its credit line with the Treasury Department to $100 billion (from the current $30 billion)

- FDIC losses will "probably be higher" than the $40 billion estimate from last Autumn

http://www.fdic.gov/news/news/speeches/chairman/spfeb0309.html

News Links

http://www.bloomberg.com/apps/news?pid=20601208&sid=aTDor5YnbmQM&refer=finance

TARP...Lookin' Real Good


http://www.cbpp.org/9-8-08sfp.htm

Watch Your Muni Portfolio


http://www.dailybusinessreview.com/Web_Blog_Stories/2009/Feb/Cmmrcial_foreclosre.html

Commercial Real Estate Woes

More Unemployed Than Estimated

The Bureau of Labor Statistics released their monthly job situation report today: 598,000 were lost in January and the unemployment rate climbed to 7.6%. This was the largest number of jobs lost in a single month since 1974 and the highest unemployment rate since 1992.

In addition, the BLS massively revised the number of job losses in 2008. Including the most recent report, 3.57 million jobs have been lost since the beginning of 2008. This number would have been closer to 3.2 million without the revisions. The BLS and ADP reports now have a tighter correlation.

Jobs Data Continues to Cause Concern

ADP released their estimate for private employment yesterday: 522,000 jobs lost in January. They revised their December estimate to a loss of 659,000 jobs from a loss of 693,000 jobs. This points to a loss of about 500,000 jobs in tomorrow's BLS report. Economists are estimating a loss of 540,000.

Weekly jobless claims were released today and provide every reason to think that the unemployment rate will soon climb to the 9% - 10% range. 626,000 initial claims were filed and continuing claims stood at 4,788,000.

These numbers are at almost 30 year highs both on an absolute and relative basis.

Fed's "Balance" Sheet: I Don't Feel So Good

From the Federal Reserve statistical release H.4.1 (1/29/09):

-- The Federal Reserve System holds $47.37 in assets for each dollar of capital

-- Their holdings of U.S. Treasury securities have decreased by $243 billion in 1 year

-- Term auction credit totaled $415 billion

-- Commercial Paper Funding Facility has provided $248 billion in liquidity

-- Deposits from depository institutions (The Fed's liability) totaled $740 billion, a $702 billion increase from a year ago

Let's not forget the assets that the Fed is carrying on their balance sheet that resulted form the Bear Stearns deal and AIG deal: $47 billion in securities that are basically impossible to price.

Those assets are the ones that are particularly dangerous to the Fed, they only have $41 billion in capital.