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I don't hold Citigroup, but as one of the more troubled financials it is influencing the perception of the sector and stocks I do own, so I listened in on today's conference call, hoping to pick up some information on the progression of the sub-prime situation.
Gary Crittenden, CFO, provided the details on what is behind Citi's projected 8-11 billion mark to market loss for the current quarter. After the end of the third quarter, Moody's and S&P announced some downgrades of subprime; also, the ABX indices took a turn for the worse. Citi re-evaluated its sub-prime exposure and elected to make an announcement of what the mark to market losses will be at the end of the quarter, if the situation doesn' change. The company utilized a model, but incorporated assumptions about the large decrease of R/E values that are implied by the ABX index.
Based on this approach, losses are projected to be 8-11 billion, of which 5-8 billion will be on a total of 43 billion of ABS CDO exposure, a loss of 20%, more or less. Crittenden stressed that nothing has been impaired or downgraded and that Citi is being paid just fine right now. As such, the loss is strictly an accounting entry, and in point of fact the entry has not even been made yet. Further, Citi intends to continue to pay its dividend and expects that its capital will meet internal goals relatively soon. I felt that this announcement was intended to demonstrate to the market that Citgroup, even under a worst case scenario, is financially sound, putting to rest the swirling rumors and speculation. Hopefully, the market will be reassured when it is viewed in that light.
Many financial institutions have resisted the use of the ABX index for mark to market purposes, on the grounds it includes only 20 names, 100% sub-prime, and all of 2006 vintage. Comparing that with a CDO which has 25 to 50% of sub-prime, of varying vintages, and not necessarily any of the names in the ABX, is apples to oranges and not really very useful. I think Citi's approach makes some sense, but I fear it will legitimate the call for all companies to mark CDOs off the ABX. What is needed is a better index.
I am also concerned that the market will jump to the conclusion that all financial companies have further mark to market losses embedded in their balance sheets, equally severe, and discount the stocks accordingly. Also, for Citigroup to report losses of that size, even when as of this moment there has been no impairment and the payments are being made timely, based the premise that this one limited index in point of fact can predict the course of R/E prices, seems to have a tenuous connection with reality.
Other issues on the call were Charles Prince's resignation, not unexpected. Also, one analyst attempted to broach the topic of risk management, as an issue underlying the large losses. Management was unapologetic, nor did they mention any planned corrective action.
I think a failure to put Citigroup's announcement in perspective, specifically the fact that as of this moment the assets are not impaired, and also the fact the the ABX is not a really good source of economic projections, may create unwarranted fear in the marketplace. In reality, the announcement is reassuring in that it demonstrates Citigroup is strong even using a worst case scenario.
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