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.