Monday, 5 November 2007

Chuck's Last Dance

The big news of the day is that Chuck, while the music is playing you've got to get up and dance, Prince's dance card is now empty. From Bloomberg:

Weill's Earnings Machine Stalls as Citigroup Writedowns Deepen

The biggest U.S. bank by assets said yesterday that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the company's profit so far this year. The New York-based company also said in a statement that Charles Prince, Weill's hand-picked successor, stepped down. Former Treasury Secretary Robert Rubin will become chairman, and Citigroup's most senior executive in Europe, Win Bischoff, will be interim CEO.

The company said credit-market upheaval in October impaired by as much as a fifth its $55 billion book of subprime mortgages and related bonds. The writedown costs, which will be recorded in the fourth quarter if markets don't recover, add to the almost $7 billion of costs for bad debt, bond and loan losses recorded in the third quarter.

The fourth-quarter charges may leave the company with a loss of 26 cents a share, Punk Ziegel & Co. analyst Dick Bove wrote in a Nov. 5 report. It would be Citigroup's first quarterly loss since at least 1998, according to data compiled by Bloomberg.

Before the announcement, the company was expected to report $5.32 billion of profit in the fourth quarter, the average estimate of six analysts surveyed by Bloomberg.

No doubt Prince walk away with a nice parachute similar to Stan O'Neal. It doesn't matter if you screw up or do great you'll still get paid on Wall Street. Pick up any financial paper and you'll the knives are out for Prince. Rather than add to that I want to concentrate on the potential fourth quarter write-downs of up to $11 billion that Citi now faces.

I've been saying for a while that this is not a one quarter event. A return to normalcy or anything approaching it is just not going to happen this quarter for the financial industry. 4Q07 earnings estimates are going to start coming down for financial stocks and that is going bring the overall market down as a whole. The optimists cheerily expecting around 10% eps growth in the fourth quarter are going to be disappointed.

Analysts living in Disneyland, who as a group were forecasting a more than $5 billion profit for Citi in the fourth quarter are now contemplating Citi's first quarterly loss since 1998. How many other financial companies earnings will Wall Street analysts completely get wrong due to the lemming like mentality that dominates their ilk? I'd say plenty

As for Citi, there have been questions raised over their capital structure and ability to maintain their dividend. Mish from MGETA has an interesting view on that topic.

Plans or not, Citigroup is going to have to reduce that dividend. And yes, its capital has been called into question. Please see Question of Solvency at Citigroup for more details....

Citigroup will not survive in its current state.

This is going to become an issue now, whether Citigroup should be sliced up. Claims will be made that it is too big and that value would be better realized if certain divisions are spun off. Funny how the wheel turns 180 degrees. 6 months ago Citi were killing it and the behemoth structure was one of it's biggest strengths.