Citigroup (C) 01 (May 08 - Nov 08)

[kennynah]

the story below...

(PS : GR happy like bird now )

Citigroup to receive $20 bln investment from Treasury - Update 1
11/24/2008 12:17 AM ET

(RTTNews) - The US government on Sunday announced an agreement with beleaguered Citigroup Inc. (C: News ) to provide a package of guarantees, liquidity access and capital. In a statement posted on the Federal Reserve site, it is stated that these actions are taken to strengthen the financial system and protect US taxpayers and the economy.

Treasury said it will invest $20 billion in the company from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. As per the terms of the investment, Citigroup has to comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.

As part of the agreement, Treasury and the Federal Deposit Insurance Corp. or FDIC said it will provide protection for up to about $306 billion in assets. Citigroup is to issue preferred shares to the Treasury and FDIC, as a fee for this arrangement.

The Federal Reserve said it is also ready to backstop residual risk in the asset pool through a non-recourse loan, if necessary.

Citigroup's shares have been hammered over the past week and dipped below $4 a share on Friday as investors feared that the company's exposure to toxic mortgage assets would turn into losses amid the economic slowdown and market turbulence.

The company has been among the hardest hit by the ongoing credit crisis, having posted four consecutive quarterly losses. The company has lost more than $20 billion over the past one year, hurt by massive write-downs of bad debts.

Citigroup is also considered to be the most vulnerable among the big U.S. banks after its failure to acquire Wachovia Corp. (WB), which was later acquired by Wells Fargo & Co. (WFC). An acquisition of Wachovia would have provided Citigroup with additional deposits that would have bolstered its capital position. The failure to acquire Wachovia reportedly triggered troubles inside Citigroup, with some executives blaming CEO Pandit and his team.

In a bid to cut costs amid the economic crisis, the company said last week that it plans to cut about 52,000 jobs and reduce expenses by 20% from their peak. The job cuts are in addition to the 23,000 jobs eliminated by the company during the first nine months of 2008. At the end of the third quarter of 2008, the company had about 352,000 employees worldwide. There have also been speculations that Citigroup's top executives would go without bonuses this year.

[blid2def]

Not really happy leh... see tonight then know. I'm actually pretty ambivalent, as long as it doesn't die... Hehehe.

[iam802]

So very complicated.

On one hand, C is getting 20B injection. (good news)

However, at the same time, C also cutting jobs. We never know how market react to this. First time cut, market cheer. But subsequent cut, there is no guarantee that market will cheer. Cos', cost cutting can only go this far, right? Show me the revenue and the profit!!

On top of that, we are looking at S&P breaching a critical support level.

[blid2def]

My thinking now is - govt already show hand liao. C is marked to be saved, like AIG. Yah, share price may still go down some more, but will it drop until it gets delisted like Fannie and Freddie? Or will it be on life support like AIG for a few years (wahlao... 1.60... maybe finally can buy this one hahaahaha)?

Even if S&P breaches - how much lower can C go?

As long as it stays listed, and if I can get it in the $1 ~ $2 range, I continue to have a chance to see this turn into a multi-bagger one day. Keyword is chance.

[kennynah]

i think it is not complex.... it is a question of one's view of C's future...bleak or full of promises...

Write a Dec 2.5 Put for a premium of 70-80 cents is very decent return and the view that about $1.80 is about the maximum losses one can assume...it is a LIMITED loss situation in this case....UNLIMITED theoretically whenever we say SHORT Put is...but in reality..it is limited to the stock plunging to $0.... a SHORT Call is then truely UNLIMITED in losses potential...

so,.... max losses of ~ $1.80, if assigned the shares, and the potential of a multi-bagger...in my mind...it's a no brainer...i will SHORT C Dec 2.5 Put once C does a rally....confirm...i wont think twice...

((edited....even if it is a no brainer for me...i should have still used my brains..... i should want to Short C Put when price drops....not when it rallies...hahaha... i see the DOW futures plunging at this hour..my brain oso screw up liao..hahaha))

[ucypmas]

For those interested, a summary of terms of the government guarantee and preference share investment can be found in the following document.

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081123a1.pdf

The terms are not that punitive, compared to what AIG got initially. I initially thought there's a risk of a Fannie/Freddie style bailout, with preferred and common stockholders getting wiped out. However on hindsight, the US government's heavy hand is probably stayed by the fact that there's two major sovereign wealth fund (GIC and Abu Dhabi Investment Authority) vested in Citi. An intervention resulting in the crushing loss of these investments will probably mean that the US banks will never again get a single dollar from any of these funds around the world.

For context, during the Fannie/Freddie bailout, the US government wiped out common and preferred stockholders, but left about 19bil of subordinated debt (bonds) intact. Some of those are probably held by foreign central banks - who also happen to own hundreds of billions of other US debt. I suppose you won't want to kick the people who lend you lots of money in the teeth...

[LenaHuat]

Some points to add to the above:
(a)

there's two major sovereign wealth fund (GIC and Abu Dhabi Investment Authority) vested in Citi.

the Saudi Prince is a quasi-govt fund. It seems to be a front for the almost invisible Saudi SWF.
(b)

For context, during the Fannie/Freddie bailout, the US government wiped out common and preferred stockholders, but left about 19bil of subordinated debt (bonds) intact

The US, being the leader of capitalism, cannot possibly wipe out commercial pte sector debt.

(c) Citibank will not issue any dividends for the next 3 years. IMHO, it's a sell into a rally. So many forumers here must be happy with its share price performance

(d) The US financial sector used to be around 12% of the GDP. It's gonna shrink to around 6% and that would mean there are massive layoffs in the pipelines.

[iam802]

I believe it's already mentioned in the news.

The moment this bailout is announced, the Treasury Bonds goes the other direction.

Somewhere, something must give way.

US printing shop will be more busy; this time round...print more bonds.

[blid2def]

After the initial euphoria, things will then start to sink in.

Full story: http://www.businessweek.com/bwdaily/dnf ... topStories

Excerpt:

Citigroup's Uneasy Victory
The federal bailout calmed the market and seems to fence off Citi's toxic assets. But some investors wonder what it says about the state of other banks

By Mara Der Hovanesian

Federal regulators got a fresh inside look at Citigroup's (C) books over the weekend—and it wasn't pretty.

The result: a new $306 billion federal bailout for the bank. On the one hand, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to be wary about whether Citi was worth saving from oblivion. Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who's next?

"You had a tremendous amount of people looking inside at Citi in the last few days to figure out how bad it was, and they came away thinking that the capital markets can't handle this," says David Ellison, manager of the $185 million FBR Small Cap Financial Fund (FBRSX). "So, Citigroup wasn't a going concern. What does it tell you about the industry and everybody else all around the world that has the same assets?"

** skipped **

According to people familiar with the negotiations, the government struck a plan to "ring-fence" around about $300 billion in questionable assets, which will remain on Citigroup's books. That was the only group of assets for which the feds and Citi could agree on a potential value, sources say. That amounts to just 15% of Citi's total assets, which are a shade over $2 trillion.

[kennynah]

GR and I had a short touch and go chat on th fate of C's price.... we figure...it might just be like all the financials that got rescued; ie AIG, FNM/FRE...first the initial euphoria and price surged..then over time...reality sinks in and price progressively moved downwards...

will C be different from the rest ?