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Citigroup: Assets Aren't Money


When I was a teenager, one of the other students at the school I went to was driven in every day in a limousine. Impressed by how rich he must be, I once mentioned how nice it must be to be so wealthy. His response surprised me. Quietly he said "we're not as well off as you might think. It's all based on debt and we don't have a lot of cash."

I didn't, honestly, entirely understand what he was saying, back then. Citigroup apparently didn't either, but it's learning:

Citigroup Inc., seeking to restore investor confidence amid massive losses due in credit markets and a lack of permanent leadership, is receiving a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government...

...Investors have increasingly expressed concerns about Citigroup's "tier 1" capital levels -- a common measure of a bank's capital adequacy -- which for the first time in years fell below its 7.5% target in the third quarter. Although the bank is still considered to be well capitalized, investors worried that Citigroup would be forced to cut its dividend.

Citigroup officials repeatedly denied that was the case and said it was taking steps to restore the capital levels by the middle of 2008. This investment will help it achieve that goal.

In english, Citi doesn't have enough cash, or cash equivlaents on hand to maintain its ratio of capital to debt. Sure, it's worth far, far more than 7.5 billion, but much of that is in assets that are illiquid, whose value is based on "modeling" and are suspect. Or, odds are, both - illiquid and overvalued on the books.

None of that matters as long as people are willing to give you credit, and buy your assets at "book" price. But when people start saying "In God We Trust, All Others Pay Cash" as those who came out of the Depression were wont to do, and financial institutions even today tend to do during a crisis--suddenly your theoretical net worth becomes a lot less meaningful and what matters is how much cash, cash equivalents and near cash instruments you have.

Citi doesn't have enough. And this won't be the last infusion they need.

Oh yeah, and I wouldn't bet on them maintaining divdends, either. Nor, if I were an investor, would I want them to.


Ian Welsh November 27, 2007 - 6:05am
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Who pays 11% interest?

In the corporate world this implies Citi carries a junk bond rating. Rather shocking for a major U.S. bank which technically is several levels higher than junk bond ratings from S&P or Moody's. Perhaps with all the option features embedded in the deal (like mandatory convertibility to shares) Abu Dhabi is entitled to additional compensation, but the combination of high dividend and 5% ownership being transferred to Abu Dhabi looks like desperation on the part of Citibank.

With this deal, over 10% of Citigroup is owned by powerful Arab interests. It's curious that there is no public uproar about this, but then again the public probably has very little affection for these large U.S. banks.

Numerian November 27, 2007 - 9:28am
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It's called betting the farm

This was predicted several years ago by astute observers (or maybe just folks who had a bit of common sense when everyone else was going crazy with greed). Petroleum producers flush with petro dollars and Asian SWF's top-heavy with offshore dollars are now repatriating them not by buying US debt instruments but by picking up choice US assets at deep discounts. When this first started to happen a couple of months ago Hank the Hammer called foul. I guess the Arabs and Asians didn't hear him, or it fell on deaf ears. I can't wait until Russia and maybe Venezuela step up to the table, too. Then there will really be some howling.

tjfxh November 27, 2007 - 6:16pm
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It isn't such a bad deal for Citi

The 11% bonds convert to stock after 3 years using a conversion rate that is up to 25% above the current stock price. In effect they are issuing stock at today's price without triggering another drop by diluting.

The fact of the current stock price being 40% below the price 3 months ago on the other hand ...

tfisb November 27, 2007 - 7:15pm
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U.S. Stock Futures Point to Rebound From Market's 10% Decline

By Michael Patterson and Elizabeth Stanton

Nov. 27 (Bloomberg) -- U.S. stock-index futures climbed, pointing to a rebound from the market's first 10 percent drop in four years, after Citigroup Inc. said it will receive a $7.5 billion cash infusion from Abu Dhabi's government.

Citigroup, which has slumped 47 percent this year, advanced after the largest U.S. bank said it will sell a stake of as much as 4.9 percent to the Abu Dhabi Investment Authority. Bank of America Corp. and JPMorgan Chase & Co., the biggest U.S. banks after Citigroup, gained in European trading.

``The message we're getting here is that there's someone out there who believes that Citibank is a great investment at these prices,'' said Scott Rothbort, president of Lakeview Asset Management in Millburn, New Jersey.

Standard & Poor's 500 Index futures expiring in December rose 9.7, or 0.7 percent, to 1,419 at 9:16 a.m. in New York. The S&P 500 yesterday extended its drop from an Oct. 9 record to 10.1 percent, marking the first ``correction'' since 2003. Dow Jones Industrial Average futures today increased 63 to 12,835, while Nasdaq-100 Index futures added 14.75 to 2,014.75.

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“I despise ideologues masquerading as objective journalists.” - Bill O'Reilly, March 30, 2007

Mark November 27, 2007 - 9:33am
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Abu Dhabi to Bolster Citigroup

Say hello to the new boss. dhfjr.

Government Investment Arm to Become a Top Holder, with Up to a 4.9% Stake

Citigroup Inc., seeking to restore investor confidence amid massive losses due in credit markets and a lack of permanent leadership, is receiving a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government.

The investment by the Abu Dhabi Investment Authority will help rebuild Citigroup's capital levels, which have been eroded by a credit crunch that began in the summer. Citigroup Chief Executive Officer and Chairman Charles Prince resigned earlier this month after the bank, which had already written off billions of dollars, said it was facing as much as $11 billion more in losses.

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I did inhale.

Don November 27, 2007 - 9:56am
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