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.
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