Investors are quickly losing faith in Citigroup (C). Shares of the company, once the largest and mightiest U.S. bank by assets and market value, have fallen 66% in November, and finished down 1.85, to 4.55, on Nov. 20. The last time the shares traded that low was 14 years ago. While the stock sank, the price soared on its credit default swaps, which measure the cost of insuring Citi's debt—another worrisome sign. The market woes are raising speculation that some sort of government intervention or major outside investment may be necessary.
Says William Fitzpatrick, an equity analyst at Optique Capital Management: "Clearly the solvency issue is back on the table."
Citi is doing its best to calm investors, reiterating that the bank isn't in critical condition. Citi issued a formal statement on Thursday, Nov. 20, saying that it "has a very strong capital and liquidity position and a unique global franchise. We are focused on executing our strategy, including our targeted expense and legacy asset reductions, and we believe the benefits will be seen over time."Saudi Prince Pledges Support
Indeed, Citi has bolstered the capital on its books in recent weeks. Less than two weeks ago, the bank—which is now fifth-largest in terms of assets—received $25 billion from the federal government, one of nine commitments made to large banks for a piece of the $700 billion bailout. Citi also received new assurances from Saudi Prince Alwaleed bin Talal, once the bank's largest shareholder, who said publicly he intended to increase his stake by $350 million, to 5%, from less than 4%, and pledged "full and complete support to Citi management."
After the Nov. 20 market close, analyst Richard X. Bove of Ladenburg Thalmann (LTS) dashed off a note reiterating his buy rating for Citi, arguing that the bank has positive net free cash flows, a strong capital base, and a diversified business base. Bove says in the end "cash flows are all that matters" and that it would "take a Depression every bit as large and long as the 1930s debacle to shake this company's viability.…I would be a buyer of this stock."
Still, the market shrugged off the support and Chief Executive Vikram Pandit continues to lose market confidence. Says Len Blum, managing director of Westwood Capital: "I don't think that Pandit has really shown the market that he has any direction. They are turning into an also-ran."Counting on the Consumer
Losing the Wachovia (WB) acquisition to rival Wells Fargo (WFC) in October was "a big blow" to Citi, says Blum, and now "every one of its employees is absolutely distracted for fear of losing their jobs. They're not calling on accounts and clients." On Nov. 17, Pandit announced a plan to eliminate 52,000 jobs (BusinessWeek.com, 11/18/08) as part of a program to cut expenses 20%. William B. Smith of Smith Asset Management in New York says it's not enough and has renewed his call for a breakup: "The board and management have breached their fiduciary responsibility to shareholders and employees. Can [anyone] still justify Pandit?"
Mostly, the market is spooked by two large unknowns: What is the extent of damage and losses in the bank's derivatives portfolio, and how bad will the consumer downturn continue to pressure results?