Citigroup

At these levels, C is trading like it’s either going to fail or be nationalized. Neither of those scenarios sounds good for the shareholders. However, we shouldn’t completely write off this stock. Let’s talk about this…..

First of all, the Feds probably will not allow Citi to fail. Regarding nationalization, it is a possibility, if the economy stays in this recession for an extended time. But, nationalization is the solution of last resort—at least that’s what we’re being told after they bound and gagged Chris Dodd.

Citi will be splitting into two parts. One will be an entity that will closely resemble the old Citicorp. The other will be a “bad bank” that will consist of $300 billion of assets that the government has agreed to backstop. The bad bank will also have some of the other businesses that Citi is looking to unload, such as 51% of Smith Barney to Morgan Stanley in a merger of the two brokers. Because Smith Barney makes money “the old fashioned way” (supposedly, they earned it), they are one of Citi’s better business. Obviously, due to present circumstances, Citi is selling SB because they need to raise capital.

Just know that Citi has a long way to go. It’s currently trading at a fraction of it’s book value (whatever that is) and will be taking in another round of TARP capital to offset losses still coming in waves of write-downs.

And, due to fortuitous “ring fencing” arrangements announced last November, they will share losses with the Federal government as well as have access to capital infusions.

C will issue $7 billion in preferred stock to the Treasury and the FDIC, in exchange for a guarantee on the $300 billion of assets in the “bad bank’s” balance sheet, that are backed by commercial and residential real estate. Citi will absorb the first $29 billion of losses on these loans, and the government will absorb 90% of the losses above that amount.  Citi will also be paying an 8% dividend instead of the 5% dividend required by TARP I.

In spite of all that, Citi is due for a bounce. This is a stock that is and will continue to be volatile, so if you like to trade, you gotta play in this sandbox.

I’ll be posting more on The PPT site later today, including what’s up with information on the new “stress test”.