Bruce Berkowitz buys Citigroup!

[ERICOPOLY]

FWIW, the view of this "man on the street" is that we haven't seen the end of loan problems owing to the much advertised hangover awaiting us in commercial real estate.  Maybe they have already taken their licks on the balance sheet, maybe not.  But based on their history who can be sure.

 

Citi has the lowest commercial real estate exposure -- only 3% of total loans.  

 

Based on the theory that consumer losses peak first, Citi is a well capitalized survivor of the consumer loan loss peak, but one with little exposure to the next debacle.

 

 

[txlaw]

Reasons for why Berkowitz and now HWIC are in Citi:

 

-We've passed the inflection point for the pig in the python losses

-Gov't ownership acted as quasi-receivership where the government would have closely examined Citi's balance sheet and off balance sheet arrangements; the government would probably not be selling if they did not think Citi could survive more economic turmoil

-Citi is still too big too fail, but the capital markets are in good enough shape that Citi probably could get private capital (or sovereign capital) to help with any further issues they might have, if any

-Citi is overcapitalized and Citi Holdings dispositions and runoff will help serve as a buffer to keep Citi Corp overcapitalized in case of more turmoil, both in the US and abroad

-Low CRE exposure compared to the other big US banks

-New loans are the best loans as we are at the bottom of the credit cycle

-Long term, Citi is in a good position as it is one of the three big network banks (see Economist special report on banking in emerging markets); you can't replicate their network, their payment systems are vital to multinationals and governments, and they will probably continue to win more advisory business from foreign firms

-Citi continues to dispose of non-core businesses and will not really be affected by the push to break up the banks, as that is already an ongoing process at Citi

 

Given all of the above plus the price at which it is trading, it will likely be a great investment over time.

 

Obviously, I own C.

[bargainman]

Reasons for why Berkowitz and now HWIC are in Citi:

 

-We've passed the inflection point for the pig in the python losses

-Gov't ownership acted as quasi-receivership where the government would have closely examined Citi's balance sheet and off balance sheet arrangements; the government would probably not be selling if they did not think Citi could survive more economic turmoil

-Citi is still too big too fail, but the capital markets are in good enough shape that Citi probably could get private capital (or sovereign capital) to help with any further issues they might have, if any

-Citi is overcapitalized and Citi Holdings dispositions and runoff will help serve as a buffer to keep Citi Corp overcapitalized in case of more turmoil, both in the US and abroad

-Low CRE exposure compared to the other big US banks

-New loans are the best loans as we are at the bottom of the credit cycle

-Long term, Citi is in a good position as it is one of the three big network banks (see Economist special report on banking in emerging markets); you can't replicate their network, their payment systems are vital to multinationals and governments, and they will probably continue to win more advisory business from foreign firms

-Citi continues to dispose of non-core businesses and will not really be affected by the push to break up the banks, as that is already an ongoing process at Citi

 

Given all of the above plus the price at which it is trading, it will likely be a great investment over time.

 

Obviously, I own C.

 

txlaw, nice summary. For those who haven't seen here is Bruce's interview about C:

 

http://www.morningstar.com/cover/videoCenter.aspx?id=324901

 

He makes about half the points you just made in the interview.

[bookie71]

-Gov't ownership acted as quasi-receivership where the government would have closely examined Citi's balance sheet and off balance sheet arrangements; the government would probably not be selling if they did not think Citi could survive more economic turmoil

.

.

Be careful - remember how many government regulatoirs were at Freddie and Fannie.

[txlaw]

-Gov't ownership acted as quasi-receivership where the government would have closely examined Citi's balance sheet and off balance sheet arrangements; the government would probably not be selling if they did not think Citi could survive more economic turmoil

.

.

Be careful - remember how many government regulatoirs were at Freddie and Fannie.

 

Your point is well taken.  However, being regulated by OFHEO pre-crisis is a little bit different than having the Fed, Treasury, and other regulators all up in your books post-crisis.  Regulators in the federal government tend to be reactive and will focus keenly on problems once they've blown up.

 

Just saw this troubling WSJ article that says that BofA, C, and DB were very active in reducing leverage at quarter end to make things appear less risky than they were.  See http://online.wsj.com/article/SB20001424052748704792104575264731572977378.html. 

 

However, the article also states the following:

 

At Citigroup, average net repo borrowings have exceeded the bank's reported period-end debt by an average of 52% over the past 10 quarters, according to the analysis. However, in each of the past two quarters, Citigroup appears not to have borrowed in the repo market in this way.  in both quarters it was a net lender, rather than a borrower, both on an average basis across the entire quarter, and at quarter's end.

 

Bankwide leverage also declined from average to period-end in most of the quarters at both Citigroup and Deutsche Bank, according to the analysis.

 

I am willing to bet that the regulators shut this practice down at Citi when the Repo 105 story began to break.

 

Also saw another post that talks about the Qatar Investment Authority possibly purchasing some of Treasury's stake in Citi.  http://dealbook.blogs.nytimes.com/2010/05/26/qatar-mulls-treasurys-shares-in-citi/