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.

Remembering My Father

My gratitude to God for my father. I am blessed to have known him, loved him, and been loved by him since the day of my birth.

My father has always been a very special person...flawed and imperfect, as we all are, but loving and generous. Today is my dad's 4th Death Anniversary. The man who had the most influence on the man I became passed away on Oct. 22, 2004. He succumbed to a heart attack at age 52 and It was one of the saddest days of our lives. My whole family was stunned as he had never been previously diagnosed with any heart conditions and it was a shock beyond words can describe. It has been said that the loss of a parent is one of life's most traumatic events. I now know the devastating truth of that statement. My dad was a very important person in my life, and he still influences me in his death. I am grateful for all of the things he did for me. I know now how right he was even when I thought I knew everything.

The last time I saw my father was a warm night in mid march, 2004. He dropped me off in the airport where I was scheduled to catch a flight back to NYC. He gave me a big hug and wished me well. He said he was proud of me and told me to take care of myself. To this day I can never forget those last moments and keep re-living them every time I close my eyes.

My father was a prideful man, but not like most would think of it. He was proud of the achievements of my mother and myself; Though my brothers were young, he always encouraged them to dream and achieve. He was proud of the achievements of everyone in our family; he was proud of the accomplishments of his friends and everything in my father's life centered on caring about others. My dad never let a friend ever be forgotten, no matter where he was, and that's a major tribute to the kind of man my father was.

My dad was a genius when it came to movies. He loved watching movies. In fact he was crazy about them. I remember he would stay up till 3.00AM watching movies almost everyday and he used to write reviews which were published for various magazines/papers. He had this knack of knowing what will click with the audience and he served as a story editor, writer and gave creative inputs for dozens of films. I remember a lot of producers and directors used to come to my dad for ideas around story and screenplay. When he listened to a story or a song for the first time, he used to say immediately if it will be a hit or flop and sure enough he was never wrong. And even now, when I watch a film or a show, the first thing I think is how he would critique it.

With my dad, every Sunday was 'Breakfast Day'. He used to take me, my brothers and all my cousins to have breakfast at our favorite drive in restaurant. I remember the first watch he bought me at Alsa Mall. To this date, I guard it with my life and wear it on every important occasion in my life. He also bought me a He-Man toy every month and I always think of him every time I look at my Castle Greyskull and remember how he used to play with us sometimes.

My dad was also a teacher early in his career and I remember all the lessons he used to give me when I was young. He used to be very strict with me when it came to studies and I remember every time I flunked, he would take extra time to tutor me and teach me the lessons again. I greatly enjoyed our time and after a while I began flunking on tests in 5th grade on purpose and would proudly come home and demand that he tutor me again.

I remember my dad taking me to learn how to drive. I got my earliest driving lessons from my dad in his white ambassador. I was so excited that he actually allowed me to get behind the wheel of his car and the more I got excited, the more paranoid he got. This one time, I remember getting into an accident as I misjudged the distance and rammed into a truck. Luckily no one was hurt and my dad was sitting next to me and had the presence of mind to handle the situation, while I was still sitting quite stunned.

Most of all, though, I remember my dad coming to the airport to pick me up and drop me off every single time I came back home. Ever since I left home, he had not even missed coming to pick me up and drop me off even once and I can still almost see him every time waiting for me when I go back home. Next was his belief in his God; belief was important to my dad. He used to make a trip to Tirupathi every year without fail even if he had to go alone.

I learned from his strengths; I learned from his weakness and it is all those strengths and weaknesses that has taught me how to be the person I am today. I was only 26 when I lost my dad and I so desperately to tell him how much has happened in the last 4 years since he has left us. I want to wrestle with him on the floor, I want to watch him working from afar. I want to fly him around the world and take him to all the places he always wanted to go but never had the time to. Though there are a lot of things I will never be able to share with him, he has left me with a life time of memories.

I never fail to think of him even though I know that he is not there anymore. Sometimes I pretend he is still there and talk to him. Over the last few years I have discovered many ways I am similar to my father, but it was not until this year that it really struck me just how many similarities there are. I cannot of course speak of them, but I just wish dad is still here with us to share our successes and happiness.

Miss you dad and we love you and I know you are watching over us and guiding us wherever you are!!

Wall Street Words

CEO --Chief Embezzlement Officer.
CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
BROKER -- What my broker has made me.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per share.
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.
INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.
PROFIT -- An archaic word no longer in use.

Mark-To-Market - Hero or Villain?

The financial markets are getting clobbered everyday to a point where it makes no sense anymore. It is not a question of 'Will', but 'When' the next write down is coming. If it not really ‘If’ but ‘Who’ will be the next bank to fail. One of the biggest problems is being blamed on the "Mark-to-Market" accounting rule. Mark-To-Market (MTM) accounting rules have turned a large problem into an ever larger one. MTM also known populary as ‘Fair Value’ accounting is facing opposition now from all quarters as it is forcing financial firms to treat all potential losses as if they were actual cash losses. i.e. this rule assumes that what people are willing to pay for an asset is always the same as the asset's value. This means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately (read today). Under such a rule, declining housing prices don't just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less. For e.g. lets say the mortgage was sold at X today. But when the value of the house reduces (especially now with the credit markets frozen up) and someone is only willing to pay X-5 for the same mortgage today, the rule says the firm must immediately write down a loss of 5 as the mortgage can be sold for X-5 today.

Its a tough rule since there is no market to establish the real value and not all assets that have no trading market are bad assets. Moreover, the firms do not have to sell them today itself, so does it make sense that they really have to value them at the prices they fetch today? Even if the firm does not sell at the low price, and even if the value of these assets is above the price at which others are willing to pay today, the firm must record them as losses on the books - the sole reason which is causing write down after write-down, thereby violating capital requirements causing the equity to tank and in turn the stock prices to fall. Once panic sets in, we have seen what can occur with Bear, Lehman and ML - people simply start panic selling, even when they know the underlying business of the company is fine. It looks like a vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent are bring forced to price assets at fire-sale values chasing away capital and leading to a further decline in asset values. All the banks have taken a hit because of this rule.

Further confusing investors, the rule has inconsistent application across industries and companies. MTM favors private companies over public companies. As the government is being so aggressive with the use of these capital regulations with the banks, we can see just about the only transactions taking place in the sub prime marketplace have been sales to private equity firms that do not have to mark assets to market prices.

Banks, though, are subject to regulatory capital standards and therefore can be rendered insolvent overnight based on an accounting write-down. The same is true of what happened to Fannie Mae and Freddie Mac, which had positive cash flow when they were nationalized by the Treasury. Here's something you won't believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury's $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.

Because of all this, Washington finds itself in a somewhat awkward position in that its own rules is rendering many financial institutions insolvent in a manner which does not reflect their true value. A lot of big banks (Actually all of them) are currently lobbying heavily in Washington to get rid of the MTM accounting rule. But I think a mere accounting rule change won't reduce foreclosures or raise home prices -- then again, if spared drastic write downs, banks might be more willing to lend, raising home prices and reducing foreclosures. The economy might just jumpstart but at this point my guess is as good as yours and the truth is no one knows how things are going to play out.