Citi’s Slow Motion Crash

The shuffling of deck chairs in the form of stock with Uncle Sam and Citigroup yesterday changes nothing about the viability of the crippled financial institution. It makes the bank’s tangible common equity ratio better at the expense of Tier-1 capital.

It really changes nothing on the bank’s balance sheet, except to change the playing field for Vikram Pandit’s battered bank and slashed the market cap by 40% yesterday.

Treasury sources say that in order for Citi to survive the upcoming two-pronged stress test, Treasury will have to take stock warrants in the bank to prop up the bank. On the second phase of the test – the dire financial scenario phase – the bank will need to issue a new super senior preferred stock to be converted to common as the bank’s needs for capital come about.

Treasury chief Tim Geithner has told anyone who will listen that the government does not wish to nationalize the banks, but Washington has a 36% stake in Citi now. It’s the largest shareholder by far, so really its semantics as to nationalization.

Uncle Sam has been in the boardroom since Citi was told to rid itself of its British chairman Win Bischoff and replaced him with President Barack Obama supporter Dick Parsons.

GE brings bad news to life

GE chairman Jeff Immelt vowed late last year that the dividend was safe for all of ’09. He couldn’t make it to March before caving in on that promise.

The troubled global industrial firm is being dragged down by the throat with its GE Capital division experiencing 50% losses year over year. Immelt stated that the dividend cut was done to save its AAA rating, that rating will be gone by the end of the month, as the company will have to shed divisions including NBC/Universal to keep other operations viable.

The global slowdown has crushed GE’s industrial division, which relied on cheap in-house funding to increase sales quarter over quarter for years.

Immelt may not survive ’09 despite his commitment to keep the company whole – and not have a fire sale. With GE’s dividend yield slashed and a single-digit stock price, many money mangers will take a hard look at holding GE stock with it increasing downside risk and diminishing returns.

PPT on board?

The markets seem to be very resilent yesterday despite a ton of bad news.
Citi’s de facto nationalization, a horribly revised 4th quarter GDP number and  continued fall out from Obama’s budget-buster plan, really did not have the market teetering on the cliff.

One has to wonder if Treasury’s Geithner finally found the Plunge Protection Team’s buy button located under his desk on the right hand side. Just seems very odd that the Dow was able to stay above the 7,000 level on a day like yesterday.

For more on Wall and Washington and the cratering economy see:


2 thoughts on “Citi’s Slow Motion Crash

  1. Cutting GE’s dividend is the best thing Jeff Immelt has done in a while, if only because it’s a decision based on the reality of today instead of the delusional culture that grew inside GE since the end of the 20th century.

    Part of me thinks Immelt realizes the culture of “managed earnings” (translation: print up money) that Jack Welch created was an illusion, but he never took forceful steps to junk it.


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