The Citi Split… Another Sweaty Wad Of Cash For Bank Of America… And Barack In Baltimore
Friday, January 16, 2009
by Martin Denholm, Managing Editor, Smart Profits Report
Dear Smart Profits Report Reader,
Welcome to the financial sector’s take on the “good cop; bad cop” theme: “Good bank; bad bank.”
After years of functioning extremely well as a bunch of different entities under one broad firm, Citigroup (NYSE: C) today decided to bite the bullet and split its operations into two parts: The good and the bad (although most of it is downright ugly).
The decision comes on the back of a whopping $8.29 billion fourth quarter loss, with management now in the process of figuring out which assets to keep, and which ones are dragging it down.
The “good bank” section will be revamped into Citicorp, led by CEO Vikram Pandit. This will involve core commercial, retail and investment banking operations worldwide.
The “bad bank” offshoot will include riskier ventures such as brokerage, retail asset management and consumer finance and will operate under a new name - Citi Holdings.
The Ultimate Poisoned Chalice
Right now, the fate of Citi Holdings is up for grabs. Because of the toxic nature of these ventures, Citigroup is still debating whether it will sell it off, or take the risk of seeing what develops and hope for the best. Currently, the company is looking for that special somebody who will get the unenviable task of running the potentially doomed division.
Unfortunately, the news means more layoffs are likely on the way. And that includes at the top. Citigroup’s lead independent director, Richard Parsons, didn’t go into details in his statement today, but he made it clear that the board of directors is in for an overhaul.
* * * * * * * * * *
Bank Of America Cashes Another Check
Meantime, one of Citigroup’s chief rivals, Bank of America (NYSE: BAC) gobbled up another huge federal government handout today.
In yesterday’s edition, we noted how the bank and government were reportedly on the verge of agreeing another cash injection into the ailing bank. And on top of $25 billion already received under the Troubled Asset Relief Program (TARP), it just scooped up a further $20 billion. Not only that, the government has agreed to guarantee $118 billion worth of potential losses from bad assets.
While the move was already expected, it was a no-brainer when BoA’s recent acquisition, Merrill Lynch, reported a staggering $15.3 billion fourth quarter loss.
In return for the aid package, most of which is to cushion the blow from Merrill’s ugly mortgage-related assets that BoA has inherited, the government will take a stake in BoA. After Citigroup, BoA is the largest recipient of taxpayer bailout money.
BoA has also slashed its dividend from $0.32 per share to just a penny - and won’t be allowed to raise it for three years without first getting government approval. It’s also being forced to cap the pay of its executives. This is the same deal that Citigroup was forced to sign when it received its bailout money in November. Guest Editor William Patalon III discussed this and more in our early December issue Banks, Bailouts, And Your Money.
Taxpayer Money “Going Down The Drain”
Naturally, this use of taxpayer money is a controversial and divisive issue. One of the most outspoken opponents of the bailout cash is Republican Senator Bob Corker from Tennessee. Quoted in Britain’s Guardian newspaper, he states, “They’ll be back for more money… our banking system is going to lose hundreds of billions of dollars,” with taxpayer money “going down the drain.”
So he’s probably not happy with the Senate’s decision on Thursday evening to release the remaining $350 billion of the original $700 billion bailout package. Not only that, Democrats want to increase the proposed $825 billion amount that Obama wants as part of a second stimulus effort.
That’s all for this week. En route to D.C. for his inauguration on Tuesday, Barack Obama and his entourage will stop right here in Baltimore tomorrow afternoon, where he’ll make a speech at the War Veterans Memorial. The city is buzzing and an estimated 100,000 folks are expected to brave 25-degree temperatures to get a piece of the action.
I’m reminded of a quote by author Charles Mackay in the book, Extraordinary Popular Delusions and the Madness of Crowds, which applies very well to investing, too: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!”
I’d like to go… but knowing this city, it will be an absolute zoo, so I think watching on television with some tea is the order of the day.
Whatever you’re doing, have a good weekend.
Martin Denholm
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