One of top questions I’ve heard (over and over) lately has been:
What about buying Citibank down here?
As little as two weeks ago, the financial services giant was trading at one dollar (in fact it dipped briefly to 97 cents).
So? How can we miss, right?
Well, I can think of few reasons why this may not be such a hot deal. But before we get to that, did you ever read the first post I wrote about Citibank? It was back in November 2007.
First, “word on the street” is the uptick rule may be reinstated.
If you were relentlessly selling short Citibank, the announcement of the return of the uptick rule ought to be enough to get you to cover your short (buy back the stock you sold short). And while it’s impossible to tell, it’s my guess we saw a lot of short covering this week.
Next, the CEO of Citibank, Vikram Pandit, circulated an internal memo to employees that stated Citi actually made a profit in January and February. That’s good, right?
Maybe.
After all, the same company managed to lose $28 billion in the previous quarter. Twenty-eight-billion-dollars! How can a company manage (mis-manage?) to do that — in just a 3-month period? Mark-to-market had much to do with the write-downs they took in the previous quarter. And that rule is still in place, it has not been suspended. So, the company may still lose money for the entire quarter. Yikes.
What else? There are millions of new shares coming onto the market. Citibank is converting many of their preferreds into common stock. This dilutes the value of common shares already in the market.
Anything else? Well, yes, maybe the worst of all. The company announced they are contemplating a reverse stock split. A study completed in 2008 showed companies that did reverse splits found these reverse splits underperformed the market by 50% (on a risk-adjusted basis) during the three-year period after the action. “Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future,” says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University’s Goizueta Business School in Atlanta.
Many companies consider pulling a reverse stock split to avoid getting delisted. But many wind up taking that path eventually anyway. Can you imagine Citibank getting delisted from the New York Stock Exchange?
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Mark to the Market
by Thomas Mullooly on February 24, 2009
Throwing good money after bad into these banks is not the answer.
Now, I don’t like changing the rules in the middle of the game. But I still believe the almost-immediate fix for this entire mess is suspending “mark to the market” regulations.
Read this statement from news sources today: Citigroup declined to comment on talks with the government, but in an email said its capital base is very strong, despite $28.5 billion of losses in the last five quarters.
How could Citigroup lose $28 billion — and say they are very strong?
Believe it or not, it is TRUE.
They HAVE to book these losses due to “mark to the market.” This is really important! When a competitor has to mark down the value of bonds, mark-to-the-market means you must do the same thing on your books…whether you sell or not!
OK, true, these same banks made profits hand-over-fist when real estate was going up and they leveraged like crazy off it. So, if you run your business that way, it’s going to be painful…no…near suicidal…when things are bad.
And that’s precisely whats happening now.
Now, a capitalist society says the weak will be extinguished. OK.
So weak auto stocks should be wiped out.
Weak homebuilders have to go.
Weak retailers, see ya.
But banks provide the grease for the entire economy. They should NOT be bailed out with cash.
Suspend mark-to-the-market. Now.
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