I published a piece here called The Citibank Risk several months ago wherein I discussed their unlikely choices in the area of customer service. Since then, that post gets several hits a day. With the continuing collapse of our financial system again taking center stage this week, I’ve decided to revisit the subject of ‘The Citibank Risk’.
The most obvious place to start is their stock performance. So far, all of the major players that have gone belly-up have shown losses of more than 60% over last year’s prices just a couple of weeks (or days) before dropping to a loss of more than 90%. Looking it up on Google, we find that CitiGroup shares are down more than two thirds over a year ago, posting a total loss of more than 67%. This puts them in the same book with the likes of Bear Stearns, IndyMac, Lehman and Merrill Lynch. While not in the same chapter yet(that would be chapter 11 or the historic appendices), Citi shows a definite leaning in the same direction.
Slippery Business Guys
The long slide for Citi began over a year ago. As the ugly end of the housing bubble appeared on the horizon, near the end of 2006 Citi started rolling up some of its companies, consolidating expenses and eliminating redundant jobs. We find the story over at SeekingAlpha:
Citibank’s assets have grown from $706 billion at the end of 2005 to $1.1 trillion due to the fact that five other bank units were rolled-up, including Citibank Delaware, Citicorp Trust NA, Citi (West) FSB, Citibank Texas NA and West NA.
As a result of these mergers, Citibank’s individual risk profile has now expanded to include the real estate assets of several former members of the FDICs mortgage specialization peer group, particularly the $121 billion asset Citi (West) FSB. At the end of 2006, real estate loans comprised 43% of Citibank’s lending book and 24% of the bank’s total assets, this vs. 15% and 8.3%, respectively, the year before.
At 454bp in gross yield, as calculated by the IRA Bank Monitor, real estate is the third most profitable area of lending for Citibank after loans to depository institutions (714bp) and miscellaneous loans (1,410bp), which is usually a euphemism for subprime loans. Indeed, looking at the high gross loan yield for Citibank’s miscellaneous loans, which comprise 3.8% of total assets, subprime consumer loans is a pretty good bet.
Subprime and More (more or less)
So we see that by the end of 2007 Citi was very heavy into subprime mortgages. About 55% of their business appeared in the subprime market, generating less than 4% of their assets. Even a red-dirt farmer like me can see that the wagon is top-heavy here.
But it gets better. In August of 2008, Citi agreed to buy back worthless ‘auction-rate securities’ and pay a $100 million fine to settle charges of defrauding consumers with false guarantees about the debt’s value. Reuters reports that Citi agreed to buy back about $7.5 billion of the junk securities from about 40,000 clients. This brings their total 2008 losses to nearly $25 billion. Total estimated losses since the subprime bubble burst: around $60 billion.
Citigroup agreed to buy back about $7.5 billion of the debt, as part of settlements with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission.
For Citigroup, which said it may face a $500 million pre-tax loss, Thursday’s settlement will hinder efforts by Chief Executive Vikram Pandit to cut costs and restore profitability following $17.4 billion of losses in the last three quarters.
Regulators said Citigroup would buy back auction-rate debt from about 40,000 retail customers, charities and small or mid-sized businesses by November 5. Citigroup agreed to fully reimburse retail investors who sold the debt at a loss.
The SEC said the bank would also use its “best efforts” to liquidate, by the end of 2009, an additional $12 billion of the debt held by more than 2,600 institutional investors.
New York and the North American Securities Administrators Association will split Citigroup’s $100 million fine.
Cuomo had accused Citigroup of wrongly telling customers the debt was safe, liquid and the equivalent of cash.
“This is not just a Wall Street issue, this is a Main Street issue,” Cuomo said at a news conference.
The settlement by Citigroup follows costly and embarrassing scandals the bank faced earlier this decade, including inflated stock research, its Japanese private bank, a rogue bond trade in Europe, and the collapses of Enron Corp and WorldCom Inc.
Citigroup has incurred more than $58 billion of write-downs and credit losses since mid-2007 as the housing market deteriorated and capital markets seized up, causing losses on subprime mortgages and other risky debt.
“It’s just one more product that’s blown up in the face of the investment banks,” said William Smith, president of Smith Asset Management Inc in New York. “The problem is they’ve got to take all these billions of dollars on the balance sheet.”
Citigroup was the largest underwriter of auction-rate debt in all but one year this decade, Thomson Financial data show.
The Cows Are Coming Home
It seems subprime was not the only bad investment Citi was pushing on the unwary consumer. Like my grandma would probably say, they were selling everything till the cows came home. Well, here they come…
On a lighter note, Citibank has put up for sale 18 properties in the San Francisco Bay area.
Citibank, the retail banking operation of financial services giant Citigroup Inc., has put 18 Bay Area branch locations on the market.
The locations for sale — which include sites in Burlingame, San Mateo, Los Altos, Palo Alto, San Jose, Santa Clara and Sunnyvale — are exceptional, said retail broker Don Tepman.
“Most, if not all, of these properties are very well located and I consider them to be among the Bay Area’s top real estate sites for retail,” Tepman said. “Rarely do we see product of this quality with such strong credit tenant backing.”
Citibank is offering to sell the locations and to sign 10-year leases plus options, according to an offering document. The company is promising annual 3 percent rent increases. The sites are for sale individually and en masse.
Shares for Citigroup (NYSE:C) plummeted more than 15 percent to close at $15.24.
So, is Citibank at risk? I think so. But I am definitely not a trained economist. And I’m not an investment advisor. I have absolutely no qualifications to back up any statements I make on the subject. I’m just some guy on the interwebs with an opinion and a blog.
But if you’re not worried about your Citi shares, well… good luck to you.
I am Jon, surrounded by the citi but not a part of it.