I guess we’ll just have to disagree on how to approach valuing the company. I prefer to use actual numbers, not simply a “gut feeling” that they could realistically go bankrupt. Personally, I don’t think the data supports odds of anything near the 1-in-5 you postulate. The fact that they can raise capital so easily shows that the odds of a capital shortfall are remote.

Even if you assign a value of zero to Citigroup’s corporate and investment banking division (even bankrupt it if you want), the U.S. retail, international retail, and global wealth management units are easily worth $90 billion, or about $18 per share. Even after dilution, that would come out to $16 per share.

Also, as far as book value, you are including intangibles in your analysis. I have never lost more money than buying companies with intangibles thinking they actually had real net value. If you take out intangibles, I believe the real number, the tangible net value is closer to $60 billion. In the last quarter they received $16.5 billion of funding, so without that, their net value would have dropped even further.

The latest news making the blogosphere, is on some of the banks exposure to VIE’s. I am including a bloomberg link to back this up http://www.bloomberg.com/apps/news?pid=20601103&sid=aFTh5VXP9m0U&refer=news
Citi apparently has $320Billion invested in them. Up until a couple days ago nobody even had heard about them. If you are not analyzing their debt and just focusing on earnings I think you are just fooling yourself.

Anonymous wrote:

“Nobody knows how bad this crunch will get and to what extent a recession develops but if it’s severe it could easily push Citi into a bankruptcy position at least as far as the simple assets -liabilites equations goes.”

Easily? How? At year-end Citigroup had $2.18T of assets and $2.07T of liabilities, so shareholder equity was $114B. How would $114B of value be wiped out for them to reach negative assets? During 2007 (a terrible year for Citi) their equity dropped from $120B to $114B. You would have to have another 19 years in a row of that level of value destruction to reach negative book value and wipe out common stockholders.

Most of the rest of the response listed negative economic statistics. I am not arguing that the economy is in good shape, but those numbers simply indicate the banks will not be as profitable in the next few years as they were in the past few, but we already know that.

To be fair, my analysis on C is fairly basic, just a look at the balance sheet and what I pick up through the media but I think there are some issues.

1) Second largest derivatives exposure of any institution at $35 trillion. I will admit this one is a bit of a long-shot that it ever melts down but hey even buffet has been warning against derivatives.

2) Look at their balance sheet. I don’t have quick access to the most recent quarter but I don’t think things have changed too much. As of september, you were balancing 2.358 trillion in assets, against 2.231 trillion in liabilities. Take out intangibles and your net assets are about 2.5% of liabilities. We haven’t even begun to get into problems with prime mortgages or credit card debt but based on their revenue figures these represent large sections of Citi’s revenue and I am thinking their ‘assets’ as well. Should their be increases in debt charge-offs, Citi could be a lost cause.

3) Really just an extension of the last point. Nobody knows how bad this crunch will get and to what extent a recession develops but if it’s severe it could easily push Citi into a bankruptcy position at least as far as the simple assets – liabilites equations goes.

I think the main point is you just don’t know what will happen. The fed used cheap money to get us out of the last recession and I have my doubts that this type of activity can last forever. If you want to look at it in terms of numbers then dig up the numbers on

a) the federal debt relative to GDP, it’s currently around 70%

b) consumer debt relative to GDP, don’t have the numbers handy but seem to recall them being at generational highs,

c) the amount of home refinancing that was flowing into the economy the last few years, I believe it was $600 billion in 06, haven’t seen 07 yet but this number could go way down if current trends continue.

d) US federal deficit of $500 billion projected for this year, not counting wars in Iraq and Afghanistan, ie the debt ratio’s are going to get worse.

e) huge trade deficit on the order of $700 trillion, this is putting pressure on the dollar as buffet has been saying for years and will continue to do so, what is the impact that that will have on interest rates if foreign sovereign investment funds lose their appetite for american debt? If interest rates are forced to rise what will that do to heavily in-debted consumers and governments?

f) Inflation in India, China, Russia. The EU concerned more about inflation than recession. How can you keep lowering interest rates if there is global inflation? If the rest of the world has inflation and the dollar is getting cheaper than america should have even higher inflation.

So you have years and years of debt accumulation which is not slowing down by the way and now a credit crunch. Oh and a recession looming. To me it just doesn’t seem like a good buy to get into one of the more heavily leveraged banks under these conditions when it’s only down 50%.

I know you are going to think me an alarmist but these are the facts as I see them. Like I said I have been on the value band-wagon for years and have sat through a lot but this time feels different.