Bearish News

Pics from my deck in Columbia, MD, taken last night (Saturday 12/19/09). We ended up with around 23 inches, but had to start shoveling at some point.

Patio table:

Treasury is making a classic investing mistake. They are desperately waiting for that loser stock in their portfolio to catch a bounce.

The loser in this case is Citigroup (NYSE: C). And it actually did catch a bid Friday afternoon, closing at $3.40.

The government’s cost basis is $3.25. But if they were to dump $25b+ of common stock on the market, C shares would crumple into a pitiful heap. The govt owns fully 34% of Citigroup.

The result of dumping all those shares on the market would not be pretty. But we should do it anyway.

Look at the recent offering, which was priced at $3.15 (notably below the govt cost-basis of $3.25). Interest in the offering was tepid, even with undoubtedly intense pressure to keep the price  above gov cost.

The point is —if Geithner was to unload Treasury’s shares, the price they’d fetch would make the public “investment” a clear loser.

We should take that loss, ASAP. The sooner we get rid of every scrap of involvement with the zombie banks, the sooner they’ll be forced to act like real businesses (which means failure for many). We should dump it all. If investors think Citi has a future, they’ll buy.

The administration is doing everything they can to avoid a paper loss. For example, so as to not scare away the suckers new Citi investors, Treasury announced it won’t start selling their 34% stake for at least 3 months. From the WSJ:

Faced with a potential paper loss of $770 million on its Citigroup stake, the Treasury said it had decided to hold off selling any of its shares until next year. Bowing to pressure from institutional investors, officials agreed not to sell the government’s shares for at least 90 days.

Look at the $38b tax break Citigroup just received, as reported by the Washington Post. The government is taking a $38b loss in tax revenue, on hopes that they can squeak out a much smaller paper-gain on the public investment. A pitiful PR coup — “See, we told you the bailouts would be profitable*“.

I say we sell now. Yeah, we’d take a hit.  But a 20% loss is preferable to a 100% loss. People need to realize that there is still a real chance Citigroup goes to zero.

If not for mark-to-imagination accounting, implicit government backing, and various accounting tricks, they’d probably be bankrupt already. See Worse Than Enron, by Nomi Prins (former director at Goldman Sachs), for more on these accounting schemes.

Stop-Loss

Seasoned investors know to cut their losses on bad investments. Hoping for a bounce (or trying to force one through proxies) isn’t an acceptable investment strategy. Especially when you’re dealing with other peoples’ money.

So far, thanks to Rubin and his disciples, Citigroup has been kept alive through herculean taxpayer-funded efforts, and changes to accounting rules. But how long can that last, really?

Citi is not a good long-term investment. Praying for a bright future does no one any good. Dump it, Geithner.

I suppose there is a (slim) chance of Citi having a bright future. If the V-shapers are right, and everything has been fixed (near zero probability of that) and banks are allowed to continue abusing their TBTF status, the US may be able to sell for a decent profit one day. But that’s a lot of ifs.

And the cost required to achieve these hypothetical profits are huge. The $38b tax-break Citi just got wipes out any “profits” the U.S. can reasonably hope for. It’s not like Citigroup is cheap, either. Despite their deceptively low ~$3 stock, the market cap is still $79b. More dilution is coming, too. At least $20b.

There’s no good reason Treasury should wait to sell Citi. It’s a $100b disaster waiting to happen. Most likely it’s technically insolvent already. We could lose a lot more if we hold off.

There are also the moral hazard implications, which are immeasurable. Memo from D.C. to bankers – Get too-big-to-fail, get lobbyists = get rich, forever.

Disclosure – No position in C.

Fascinating talk at TED (Dec 2008).

One of the comments over at Ted.com included this quote, which I like:

The society which scorns excellence in plumbing because plumbing is a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy. Neither its pipes nor its theories will hold water

Substitute banking/economics for philosophy, and I like it even better.

From FDIC.gov:

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved a $4.0 billion Corporate Operating Budget for 2010. The Board also revised the current 2009 budget to $2.6 billion.

‘The 2010 budget is a prudent and measured response to current conditions in the banking industry,’ said FDIC Chairman Sheila Bair. ‘It will ensure that we are prepared to handle an even-larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions.’

The 2010 operating budget will increase more than $1.4 billion (55%) from 2009, primarily due to the cyclical nature of bank failures. The receivership funding component of the 2010 budget, the vast majority of which is funded by receiverships, will be $2.5 billion, up from $1.3 billion in 2009. This includes funding for the continuing work associated with bank failures that have occurred over the past two years. The budget also contains contingency funding for the possible continuation of an elevated number of bank failures in 2010. The 2010 budget increase also is partially attributable to increased supervisory activity related to the rising number of troubled banks which the FDIC oversees.

In conjunction with its approval of the 2010 operating budget, the Board also approved an authorized 2010 staffing level of 8,653 employees, up from 7,010 in 2009. Almost all the additional staff will be hired on a temporary basis. They will be hired primarily to assist with bank closings; to perform follow-on work related to the management and sale of failed bank assets; and to conduct bank examinations and perform other bank supervisory activities.

Lots of bank failures next year could cripple the FDIC’s wounded reserve fund. As the chart below shows (via Rolfe Winkler), their reserves aren’t pretty. Don’t worry about bank runs, though. The real concern is them having to borrow money from Treasury, and the consequences that would have. They’d have to drop that whole “fully funded by our banks” line, for one…