So asked the New York Times this weekend in a 3,000 word article this weekend, that eventually came to the conclusion that a debt-for-equity swap was probably, sort of, the only answer to the bank’s problems.
However, the piece has drawn a furious response from Rochdale Research voluble banking analyst Richard X. Bove, who reckons the authors, Andrew Martin and Gretchen Morgenson, have completely missed the point: which is that Citi is already dead and the body is being dismembered.
What the writer does not understand is that Citigroup is already dead. It will not rise from its death experience. A small portion of what was Citigroup, called Citicorp, will arise as a very successful company. But Citicorp is not Citigroup and Citicorp is not too big to fail.
The New York Times article is typical of the backward looking pieces being written about this company. Plus, it is flawed by a lack of understanding as to what Citigroup was in the 1920s (I suggest the writers read Citibank by Harold van B. Cleveland and Thomas Huertas, or The Banker’s Life by George S. Moore, or Wriston by Philip Zweig if they really want to understand this period); a misreading of how powerful the company was (or really was not in the past decade when it was far from being number one across the board and was closer to being a minor factor in many businesses and places around the world) and what the company is now. Plus, Alan Greenspan did not save the banking industry in 1990 by cutting interest rates. This cliché is ridiculous
Now, in order to understand where Citi is going, Bove adds, it is necessary to understand why it no longer exists.
In September 2007, this company had $2.4 trillion in assets. Two years later it had $1.9 trillion or $400 billion less. However, the company has been broken into two entities and the one that is to survive, Citicorp, only has $1.0 trillion in assets. Thus, the ongoing part of this company only has approximately 40% of what the old Citigroup controlled.
Citigroup has sold huge portions of its company in the past two years and has huge portions left to be sold.
Bove goes on to list these businesses, but we won’t because it is just too long. However, his point is the Citi is now an experiment on how to liquidate a company that poses (or posed) a systemic risk.
Investors need to understand what the New York Times and others do not. Citigroup failed and is being liquidated. Citicorp is not too big to fail and is actually quite attractive. Once the liquidation of Citigroup is complete, investors will be left with a very attractive banking company with powerful niche positions. It should be owned.Hence the prolific Bove has a “buy” rating and a $6.50 target price on Citi.
Related link:
The perils of instant analysis – FT Alphaville