Citi - Finally Going To Sleep

$3.77 – Closing price of Citibank today. Investors have seen similar stories this year, with Bear, Lehman, Merrill, and the endings are very unpleasant when consumer confidence falls. Looks like the end is in sight for yet another great American company: Citigroup, once the biggest U.S. financial institution of them all, looks like it is dangerously close to merging, tanking, folding, failing, falling or however else you want to say it. The shares fell today to a 12 year low even while there was a big rally in the market.

Citi Never sleeps - The once famous phrase used to describe the company may just be used for the last times in the coming weeks (or should I say days) Looking back, I guess the whole idea behind Citigroup was flawed from the start. Unbeatable scale in financial services? Forget it. We now see the good Citi's size has done for investors: the company has an unworkable business model. It is run by a senior management team that's largely unproven, with scant experience operating a large financial institution. And the company's risk controls (if the past few years are any evidence) are hopelessly inadequate to the task. While the conventional wisdom says Citi is too big to fail, the reality is it's too big to manage. As a result, the company has become a publicly traded incarnation of Murphy's Law: anything that can go wrong almost certainly will-and probably sooner rather than later. And $25 billion in TARP money isn't going to do much to turn things around. Worries about Citigroup’s problem assets will continue to weigh down investor confidence. Citigroup’s shares have traded as high as $35.29 in the past 52 weeks. It closed today under $4. Its market capitalization (market cap) – the actual value of a publicly traded company – has plunged from $195 billion at the stock’s 52-week high to just under $21 billion today.

I think it is better for the management to move quickly to sell parts of the company or merge with someone else (Goldman and Morgan Stanley have been mentioned).Citi has notched losses in each of the past four quarters, including a $2.8 billion loss in the third quarter, and has taken in excess of $40 billion in write-downs. With news like 52,000 job cuts and slash expenses by 20% just weakens the confidence and is not helping its stock. Most institutional investors and pension funds are barred from owning stocks below $5. So if Citigroup's stock remains below that level, it could trigger a wave of selling that would send the share price even lower. Though not immediately, the money managers have to get out before the end of the quarter if the price does not bounce back.

On the upside, Citi does have a strong franchise overseas and there is no sign anyone is making a run on the bank. It has sufficient liquidity and is in a comfortable position capital wise. All the institutional traders are still doing business with the bank. But the question is, can Vikram Pandit withstand the pressure or will he give in and do a deal or even sell of pieces of the company to appease the public sentiment.

It's getting to the point where it's make-or-break time. The only thing going against Citi is the loss of confidence and it may just be strong enough to bring the behemoth down to its knees. If today is any indicator, Citibank in its present form cannot, and almost certainly will not, continue to exist.

The Big 3...or Just 3

There has been so much drama over the last 2 weeks focusing on Detroit. GM, Chrysler and Ford (or the Big 3) wants a government bailout (heck why not, everyone else on Wall Street is getting free money for screwing up) but no agreement has been reached so far. The democrats flew to Detroit, headed by Pelosi, and met the big guns and promised them a bailout. The big three came back to Washington and in their private jets (what were they thinking) and asked for a 25 Billion package and said Bankruptcy was not an option for them. Then the lame duck congress rebuffed them and now the democrats have given them until 2 Dec to submit a viable turnaround plan so assistance can be given to them. Phew!!

I guess in this economy it is all but boiling down to consumer confidence. And make no mistake, it will get worse and fear has already taken over the entire country. But giving the auto industry a bailout does not solve anything. Assistance of some, shape or form will probably be worked out by the new administration, but my point is nothing is going to change until the American auto industry fundamentally changes its current practices. GM, Ford and Chrysler may ultimately receive loans or other financial support from the U.S. government, although the form, timing, and magnitude of this assistance are difficult to predict. The govt will probably give billions without knowing what it is getting into (read AIG, after announcing a $85 billion bailout, the govt increased it to $140 billion and still no one knows what’s going on there). Anyways, it is important to stress that such assistance will only buy more time for these companies rather than as a solution to their fundamental business risks, which will remain no matter how much money they are given.

If any bailout is given, there should be a lot of strings attached. First, Detroit’s huge disadvantage in costs relative to foreign brands must be eliminated. There needs to be a fundamental shift in the cost burden weighing down the industry and the cumbersome contracts with UAW that make work rules a constant challenge. The American car companies are unable to compete as they are not able to align pay and benefits to those of competitors like Honda, Nissan and Toyota. Also, the existing management must be shown the door. None of the CEO's want to step down and take responsibility but all of them want a free pass (read tax payer's money). Rick Wagoner has been the CEO for the last 8 years at GM and he literally has nothing to show for it. I wonder what change he is going to bring once he gets our money. If he was going to bring the change he is promising, GM would not be begging for assistance. Robert Nardelli who heads Chrysler took a $210 million package from Home Depot last year and landed this job. Wonder what real incentive he has to bring about any change. Alan Mullaly, CEO of Ford, has indiscriminately fired his workforce in the name of cutting costs and Ford literally has no one left to bring about any change no matter how much money they receive. The stakes are high. The Detroit automakers employ nearly a quarter-million workers, and more than 730,000 other workers produce materials and parts that go into cars. About 1 million more people work in dealerships nationwide. They burned through nearly $18 billion in cash reserves during the last quarter - about $7 billion at GM, almost $8 billion at Ford and $3 billion at Chrysler. GM and Chrysler have said they could collapse in weeks. So no two ways about it in my opinion. The existing management has to be fired if any meaningful turnaround is to be achieved in the Auto Industry.

There is another interesting question which the big three are asking to make a case for their bailout stating that Consumers will not buy cars from a bankrupt company. But at this point they have all accepted that they are burning through cash at an alarming rate and GM has publicly stated it may not survive for long as it has no liquidity. Interestingly, while all of them want money, none of them have anything to say explaining how the money will be spent. Though it is a tough decision, filing for Chapter 11 and/or an organized bankruptcy may give them the best chance of re-structuring and re-negotiating existing thorns and ultimately re-emerging as a stronger player.

Where Will It End?

I got an interesting email from my sister this morning and she could not have summed up the pain and frustration everyone is feeling any better. So with her permission, I am putting up her email on my blog. So here goes.....

Are'nt we all getting tired of this recession? Yeah yeah there are a bunch of you out there who are still in denial about the country being in recession, but whatever you'd like to call it, are'nt we just beat, bored, broken down, burned out, distressed, drained, exhausted, fed up, pooped, worn out and just dog-tired of what’s going on? Yes the down turn is in its peak, yes the government has no money, yes people are losing their jobs and yes we're scared to spend in the fear of losing our jobs. 2008 saw the fall of the bank and 2009 is going to see how this translates into core industry. A couple of weeks back there was a surge of hope when the American folk went and voted for the the golden boy .... but the stock market has accomplished stripping us of all traces of elevated spirits after that.

The DOW closed under 8000 yesterday and while it sounds about right, there’s a part of me that wants the DOW to plummet to its lowest ....TODAY! At least we can move on after that. But the other part of me knows that we can’t drop too fast either. We need to feel every pang of misery, slowly and painfully, so that we rid ourselves of all our sins and make for a fresh start.

The dot com bust and the govt surplus during the Clinton administration was reason enough for the recession to set in (its a zero sum game people - surplus with the govt means no money circulating amongst the public - well more or less), but that recession was one that should have been worse than it was. The super hero of the moment was Alan - Visionary - Greenspan. When Clinton shouted 'Affordable Homes for all Americans' Greenspan should have stepped down and let the monkey run the Fed in the hope of a random lucky move that monkey might have made. Instead he sealed the fate of the economy with his monetary policies. Affordable homes indeed.... all for about 2 seconds.. then they became unaffordable again when the 'visionary' raised interest rates and forced the American to default. Lets not forget the banks.. now now how could we forget the greed that this industry so beautifully camouflages into helpful stances for all common man! You're worried about Wall Street - HA! Main Street feeds Wall Street's avarice!!

So where are we now? The American man cant pay back his home loan - so banks don’t have any money - so corporations cant borrow money - so corporations cant start new projects - so corporations have to let go of workers - so workers cant pay their mortgages... what a cycle!.. and once started we cant stop the downward spiral. And not to forget the derivative markets that have exploited every single portion of this cycle. Now with everything failing, is there a floor? We thought banks might see their write-off floors when the government proposed the buying of troubled assets. Banks could sell their troubled assets for eg. 40 cents on the dollar (whatever the amount - we don’t know) and they would not have to write off more than the left over 60 cents. Banks would rake in the 40 cents as capital and life was supposed to move forward. The $700B bill struggled initially but finally went through both the Senate and the House and Henry Paulson took possession of the first $350B to start his clean up work... We've seen the stock markets rally and spiral a few times since then and we've also seen the new president-elect create waves.. but we haven’t seen the buying of troubled assets. From his statements, it seems like Hank's changed his mind. Bank stocks are plunging again and we have no idea what the floor is. Whatever it turns out to be, lets hope we don’t see it higher or sooner than it should be. From the policies during the last recession, Greenspan created a huger monster that is the down turn now.. With all the bailouts and the bandaging and caretaking the Feds are doing, lets hope we're not creating an even bigger mess.

Go(O)bama

I must admit, being a conservative and a supporter of Bush so far, Obama certainly grabbed my attention ever since he began his run for presidency. The way he ran his campaign was admirable and he never hit anyone below the belt. He always emphasized on hope and made the country feel inclusive in all his messages. I stayed up watching TV and when the winner was revealed, it was certainly a profound moment. Given the history of the country and where we have come, I was reassured that the American Dream is real and alive.

I guess the over-whelming reason Barack won is because the whole country wants someone to desperately restart the country, from the economy to the living standards, from education to health care and of course the foreign policy - everything appears to be currently broken. The country gave a clear mandate as they see in Obama what they wanted to see - Hope. No one trusts Bush anymore (even me) and the republicans were sent packing as they should have been. To Obamas credit, he had perfect execution of most of his themes and he hammered a home-run with his campaign’s ground game. McCain and Palin..Well, I won’t go there but after she shopped for $150k, I knew it was totally over for both of them.

People have voted for change - What change Obama can bring and the direction of the change remains to be seen. I will pray he is a successful president as America really needs a new direction.