Never mind the Rubin news; that was all but a given. And the Bischoff news
is not that much of a big deal either: the chap is the classic safe pair of
hands who will be competent enough at managing Citigroup that there isn’t an
unhealthy sense of urgency about finding a new CEO. (Merrill Lynch, by contrast,
sans any CEO at all, is in much more of a rush.) No: the really big
news this morning is Citi’s new losses. The WSJ reports
that
Citigroup also said it will write off between $8 billion and $11 billion
to reflect the declining value of subprime-mortgage-related securities since
Sept. 30.
This is a major problem, and we can expect another lurching drop in Citi shares
today. The new write-offs are just what Citi does not need, given its already-weak
capital position. The last time that Citi announced massive write-offs, the
stock rose, in the hope and expectation that all the bad news was now in the
past. This time, the bank won’t get off so easily.
It’s not hard to see where the write-offs are coming from: Citi, it turns out,
is warehousing
$11.7 billion in subprime-backed securities, just waiting to be able to sell
them. And that’s on top of $43 billion in "super-senior" subprime-backed
notes which it kept on purpose. What all of these illiquid securities are actually
worth is a question which simply can’t be answered with any degree of accuracy;
what’s certain is that a rash of recent ratings-agency downgrades has forced
any model with credit-rating inputs to spit out much lower valuations.
Meanwhile, the official Citi memo quotes
Bob Rubin and Win Bischoff as saying this:
Both of us will work closely with our Board and the talented operating and
executive leadership of Citi to maintain the momentum of our business during
this interim period.
Um. Citi’s momentum, right now, is downwards, and rapid. I really don’t think
they want to maintain it; rather, they want to reverse it.
That said, it’s not all bad at Citi. The bank has much greater global diversification
than any other US bank, which gives it a natural hedge against a weakening dollar
and US economy. Go to Poland or Mexico or Japan and Citi is a feared, not wounded,
giant. And its sheer size is awe-inspiring: there aren’t many companies on the
planet which could take $10 billion of write-downs and still potentially
make a profit in the fourth quarter.
Rubin and Bischoff do say in their memo that they "expect to get back
to our targeted capital ratios by the end of 2Q08, including paying the current
dividend", which is an ambitious target, I think, depending on what those
"targeted capital ratios" might be. If Citi can nurse itself back
into a healthy state by the middle of next year, even in the face of a slowdown
in US economic growth, then there might be cause for optimism. For the time
being, however, the financial markets will be right to treat Citi with great
caution. There’s really no reason that things shouldn’t get worse before they
get worse.