With the full faith and credit of the United States of America behind it, Citigroup (C) is now liberated to rid itself of toxic assets while strengthening its balance sheet. Why not get the bad news out when you know the government is at your back?
Without that, the news on Thursday from Citigroup may very well have triggered a sell-off in the stock that could have resulted in it failing. Not in this day and age, though. We are in the age of socializing risk while privatizing profits.
Forget about the capital recently deployed by the government to obtain preferred stock. (See also: “Winners and Losers of the Bailout.”) C will gladly pay that dividend knowing that more dollars are available should they need them.
So, in that environment it should be no surprise that the company reported its fourth straight quarterly loss today. This time around the loss was to the tune of $2.8 billion, or $0.60—a stark contrast to a year ago when the company earned a $0.44 profit.
It would be an understatement to say that the housing crunch has absolutely paralyzed this once proud institution. The only silver lining is that the results beat expectations. Analysts assumed the loss would be at $0.70.
That is no small consolation when the company is forced to write-down $4.4 billion and announce job layoffs totaling 11,000. Will this be enough for the company to survive the current environment?
Does it matter? If the government absorbs losses, who cares where the company stands today?
>
Well, not so fast. It does matter to common holders—especially if the forthcoming recession is long and deep. During a conference call with investors, Citigroup warned of negative consequences if the unemployment rate goes above 6% combined with a slowing economy.
I have news for you. Those conditions are here, and I would listen to the company when they say that consequences will be negative.
How negative?
First, I would expect credit card delinquencies to start having an impact on the company’s results. Second, home mortgage defaults would continue to be weak. There is simply no easy way out of this mess.
Time is what it will take to survive, and fortunately C is one of the chosen ones. That being said, further losses and additional needs for capital may result in the government requesting more ownership at the expense of current common holders.
At the moment it would not appear that Citigroup is expecting such a fate. In order to take advantage of weakness in the market, the company is actively pursuing acquisitions.
They were in the running for both Washington Mutual and Wachovia. Rumors have it that they are interested or looking at National City (NCC). Does that mean management sees brighter days ahead? (See also: "Super-Intense Stock Plunge May Bring Opportunity.")
Nope. I would only interpret these statements as bold representation of strength that may or may not be there. It looks like a bluff to me if you want my honest opinion. Other investors feel the same way as C was down 2% today on the news.
Over the long haul, the government protection is a strong reason for owning the stock. Once the skies do clear, C should be one of those left standing.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
