Is Citigroup setting up to FAIL ?
Posted
May 12 2008, 10:27 AM
by
Andrew Horowitz
The saga for
Citigroup continues and rest assured that it is not going to subside anytime in the near future. In an effort to bring in capital, it is now
planning hoping to sell its Japanese consumer finance unit. The move is intended to plug another hole in Citigroup's very leaky dam. In doing this, there are two results that Citigroup is likely trying to achieve:
- Keeping the parent alive by selling off the child, at least for the time being;
- Stopping any drag from the Japanese division which is reported to have over $400 billion of assets, approximately 20% of the total value of Citigroup's assets.
The problem is that the valuing of these assets has become difficult as it is now a moving target since many of the traditional metrics have been tossed out during this historic market condition. Knowing that, it is interesting that Citigroup would consider selling at a time when the price could be at its lowest.
Should we believe that this move will bring Citigroup closer to finding a permanent solution for their problems rather than just another stall tactic before the inevitable? Over the past 6 months, we have have read and heard continuing comments like, "Citigroup has no chance of going under as much of the problems will eventually work out." Yet, most of those comments have been born out of the idea that Citigroup is one of the few financial companies that were well capitalized and well run. But, are they?
If we look at the recent moves by Citigroup to re-capitalize, it is painfully apparent that Citi is no longer exempt from the possibility of failure/insolvency. The latest plan announced comes way too close to the last capital infusion maneuver. Yet, in response to the May 9th Citigroup announcement, analyst Richard Bove, commented that:
He was convinced that the long-suffering company had reached a turning point. "Over the four-hour conference call they laid out a series of specific actions, and I buy it."
Then again, he also upgraded Citigroup back in late November 2007.
Aside from this and aside from the surprising $3 billion secondary offering on April 30, Citigroup has now panhandled upwards of $40 billion during the past
few months. Several analysts do not believe that this is going to be the last time. Recently Goldman Sachs commented that “additional capital raises will likely also be in the form of common equity, which is most dilutive to shareholders (conversely, we view this as a positive for debt holders).”
As the financial sector and more specifically the brokerages continue to scramble to keep their businesses solvent, Morgan Stanley has announced that they are raising $4 billion for a new fund that invests in infrastructure projects such as ports and parking lots. Perhaps they will extend the offering to include ailing financial firms looking to unload divisions at flea-market prices.
The fact is that the ongoing fears about Citigroup have been justified thus far and it will require a significant amount of additional capital or a miraculous turnaround for this company to come out of the Intensive Care Unit. For now, unless you need capital-gain offsets, perhaps staying on the sideline is the best course of action with this name. The truth is that there is no truth when it comes to the financials right now. That can be easily seen with the news flowing from American International Group and others like IndyMac that have no idea what is going on within their own house. Until such time that any of these institutions can show that they have a handle on all divisions, I am relatively certain that we will continue to see skeletons coming out of closets. While investors have punished shares of Citigroup for their obvious blunders, a real lesson needs to be taught before we can move on to a time that will allow for investing with the confidence that all of the surprises are behind us.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
