Company WatchANALYSIS OF BREAKING NEWS | Citigroup (C) |  - Co. Watch is available via RSS feed
| How Bad Can It Get?
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March 4, 2008 - Citigroup (C-NYSE) is in the news (along with a lot of other banks) because of capital concerns. There's speculation as to whether Citi raised enough new capital ($26 billion in the last 3 months) to keep it going. Citi officials claim they have sufficient amounts now to sustain any further losses. Outside investors, such as the chief executive of Dubai International Capital, question that. Who's right?
No one will know until the next quarterly statement. Here's the problem. Whatever the loan loss is today, it will not be the same at the end of the quarter. Every day Citi management comes in and gets a printout of delinquent loans (ones that are behind in their payments by 90 days or less) and loans in default (loans that haven't paid for 90 days). That's good information, for that day. Management can give a good guess (based on historical data as well as hands on loan specific information) as to whether a loan will be worked out and brought current or foreclosure is necessary. If it's foreclosure, then a capital hit may or may not be required.
That's because no one can guess the loss on a loan until the property is sold and everything is settled. Some of the loans might break even or make a small profit if the bank takes over the property, and it sells for more than the value of the loan. That usually doesn't happen because if the homeowner can sell the house for a profit, he or she will, then pay off the bank. Usually the bank only gets the house if there will be a loss to the bank. Just how much that loss will be is the open question. And that's a moving target. Until the sale is complete, management can only give a best guess. That's done on a daily basis. What is known today doesn't include the unknown tomorrow.
Tomorrow comes and a new report is generated. Some of the loans have been brought current. They drop from the list. No capital will be required to salvage those. New loans will appear as delinquent or in default. New guesses will be made. Until the last day of the quarter. Then we'll all know what the damage is. Up to that day. How much more there is behind those losses will be another guess. Until the end of the next quarter. Then we'll know more.
Until the losses stop, no one can know how bad they will be. Only best guesses. So far all the guesses have been low. Hopefully that changes.
- Company Web site: www.citi.com
- Ted Allrich
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