Tuesday, March 10, 2009

Did Citigroup Just Bet the Ranch?

Today, March 10, 2009, the Dow Jones Industrial Average rose 379 points, about 5.8%. A crucial reason for the upward burst was a Citigroup memo, from CEO Vikram Pandit to employees, which wound up in the hands of the press. The memo stated that Citigroup was profitable for the first two months of the year.

This memo was filed with the SEC, possibly because its leakage into the public realm may have made filing advisable under the SEC's Regulation FD. One wonders whether Pandit considered the possibility of a leak before issuing the memo. A corporation's financial results after the first two months of a quarter can often be quite preliminary. A lot of hard decisions about asset writedowns, loan loss reserves, and other crucial accounting items are made in the last month of the quarter. Many are made in the last few days of the quarter. The fact that a corporation is profitable before these tough calls are made may be of little significance by the time quarterly results are reported.

By all indications, all of the stressors on Citigroup's financial performance over the last year and a half persist. The real estate market continues to fall, credit is freezing up again, bids on hinky assets are lower than a snake's belly, the U.S. and world economies are sinking at increasing velocities, loans of every stripe and variety are experiencing increasing rates of default, and the federal government continues its slow, torpid fan dance about nationalizing, or not, the major banks. Is there a significant risk of more big writedowns by Citigroup at the end of this quarter? Does a bear sit in the woods?

If Citigroup does report bad numbers at the end of the current quarter, today's memo from Pandit will acquire a haunting quality. Clearly the market took it positively. An adverse report of full quarterly results will not only have a negative impact on the stock market, but the negativity will be exacerbated by the contrast with today's upbeat message. In such circumstances, Citigroup would likely buy itself shareholder lawsuits and regulatory investigations. But those would be minor concerns compared to its loss of credibility in the market. The worst thing a large, troubled bank could do today is to raise hopes, only to dash them a few weeks later. At that juncture, any potential for private infusions of capital would, however evanescent they may be today, totally evaporate. Nationalization would be the bank's only future.

So Citigroup may have bet the ranch today. We'll soon find out if that's so.

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