Citigroup: Dangerous Penny Stock

For decades, agencies like the SEC have warned investors about the dangers of “penny stocks.”  There is even a special statement your broker is required to give you before you can buy such a stock.  It tells you scary things like this:

“Penny stocks are low-priced shares of small companies. Penny stocks may trade infrequently – which means that it may be difficult to sell penny stock shares once you have them. Because it may also be difficult to find quotations for penny stocks, they may be impossible to accurately price. Investors in penny stock should be prepared for the possibility that they may lose their whole investment.”

Today the capstone of American finance, Citigroup (C), became a penny stock.  Citi shares traded as low as 97 cents but bounced back to close at $1.02.  Bank of America (BAC) is not far behind at $3.17.  Even mighty General Electric (GE) can be bought for $6.70.  Needless to say, all these stocks are valued at a fraction of where they were a year ago.  How the mighty have fallen.

For anyone who bought Citi today and didn’t get their SEC warning, let me summarize: YOUR MONEY IS GONE!  The shares you bought in exchange for cash give you nothing more than a place at the end of a long line of people who will be seeking their piece of the carcass when Citi goes belly-up, which will probably happen very soon.

Do not expect the government to come to your rescue.  If anyone gets rescued, it will be the big-time investors from whom Citi borrowed loads of money in a desperate attempt to convince the world it was not ridiculously insolvent.  They have friends in high places in Washington.  You don’t.  This is the financial reality of 2009.

Good-bye, Citi.  It was nice knowing you.

Parsons Gets Key to the Citi

Embattled Citigroup announced todaythat its board chairman, Sir Win Bischoff, will retire next month.  He will be replaced by Richard Parsons, who is currently a board member and Lead Director.  Vikram Pandit will remain CEO.

Mr. Parsons is best known as the former head of Time Warner.  He was one of the first African-Americans to reach the top ranks of the corporate world.  He has also been politically activein both parties, working with Nelson Rockefeller, Gerald Ford, and Rudy Giuilani, and more recently as an advisor to Barack Obama.

This is probably a good move for Citi.  Sir Win does not appear to have been very effective as a leader – though, in his defense, it’s not clear any one human can lead a polyglot like Citigroup.  Parsons took over Time Warner at a difficult time and successfully stabilized the company.  Citigroup could definitely use some stabilizing right now.

The press releasefrom Citi has a curious little quirk that might be revealing.  Consider this paragraph:

“Mr. Parsons, 60, is an experienced and accomplished corporate leader. Previously, Parsons served as Chairman and Chief Executive Officer of Dime Bancorp, Inc., where he successfully worked with government regulators to enable the bank to continue as a private sector enterprise. He has also previously served in the positions of President, Chief Executive Officer and Chairman at Time Warner, where he led the company’s turnaround after its merger with America Online in 2000. Prior to that, Mr. Parsons was managing partner of the New York law firm Patterson, Belknap, Webb & Tyler, and held various positions in the state and federal government, including as counsel for Nelson Rockefeller and senior White House aide under President Gerald Ford.”

Press releases like this are carefully phrased by public relations professionals to communicate the message the company wants to send.  Nothing is accidental.  With that in mind, note the very first thing they say about Parsons.  It’s not his Time Warner experience, his legal experience, or his political experience.  All that comes later.

Instead, Citi chose to highlight the role Parsons played at Dime Bancorp.  Was this because it was most recent?  No, Parsons left Dime in 1995.  Citi seems to think it significant that Parson’s main accomplishment at Dime was “to enable the bank to continue as a private sector enterprise.”

Hmmm, is someone concerned that Citigroup will not continue as a private sector enterprise?  And is it a coincidence that two days after the Obama inauguration, a supporter and advisor is being installed at the top of one of the nation’s largest banking institutions?  I think there may be more going on here than just a reshuffling of leadership.

Disclosure: no positions

Banks: The Final Countdown

Something strange is happening – or about to happen.  Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) all moved up their quarterly reports to this week.  None have offered any coherent explanation for doing so.  What are they trying to get ahead of?

Meanwhile, today BAC received a $138 billion federal bailout to cover both its own losses and those of newly acquired Merrill Lynch.  Citigroup announced a new plan to dismember itself into Good Citi and Bad Citi.  Bloomberg also reported that the Obama team is considering even more dramatic measures to resolve the banking crisis.  The new president himself has spoken about the need to have “ammunition” on his first days in office.  It appears he will get it, with Congress likely to approve the $350 billion second tranche of TARP money.

It sure looks like something big will happen either this weekend or next week.  What it will be is anyone’s guess.  My guess is it will somehow involve the government taking on the worthless mortgage securities and other derivatives that are weighing down the banks.  This may save the banking system from total meltdown, but it won’t keep the economy out of recession.

Whatever the plan is, we’ll find out soon.  Stay tuned.

Connecting the Dots: Is Citi Going Down?

Citigroup, whose ticker symbol is a memorable and simple C, is the classic “Too Big To Fail” financial institution.  If you are unfortunate enough to be a shareholder, though, you probably do not feel like you’ve been rescued.  Two years ago, your shares were valued north of $50.  Now they are struggling to stay above $5.

This plunge took place despite (some would say because of) extraordinary efforts by the Treasury and the Federal Reserve to keep Citi alive over the last few months.  Will Citi disappear like Bear Stearns and Lehman Brothers?  Probably not, but my guess is it will not survive in its current form.  The process may already be underway.

Today Citi confirmed it is in talks to sell its Smith Barney brokerage unit to Morgan Stanley (MS).  The price that is being thrown around is $10 billion, to be paid over a period of several years.  (I tried but could not confirm reports that the combined firm will be called the “Citi Morg.”)

This is probably a good move.  The “financial supermarket” concept is clearly dead, so there is no reason for Citigroup to distract itself with Smith Barney any longer.  Business will be much better if the bankers focus on being good bankers and the brokers focus on being good brokers.  The bigger question is whether we will get a chance to find out.  The $10 billion proceeds from this sale are a drop in the bucket next to the trillions in liabilities that will remain on Citi’s books.

Conspiracy-minded bloggers are speculating that President-Elect Obama’s desire to have the remaining $350 billion in TARP money available to him as soon as he takes office is related to an impending catastrophe that has not been publicly revealed.  A Citigroup failure would certainly qualify.  Under this theory, Citi is being pushed by the authorities to shed extraneous assets like Smith Barney in order to prepare for a more dramatic restructuring.  Another clue: the sudden departure of Robert Rubin from his perch on Citi’s board.

I personally would not cry if Citicorp went down in flames, but I greatly doubt such a thing will be allowed to happen.  Instead it will be chopped up into little pieces under federal stewardship and emerge from the crisis as a mere shell of its former self.  Not exactly capitalism at its best – but better than some of the alternatives.

Disclosure: no position