Saturday, December 29, 2007

Citi: Some quick math

Analysts warned this week that Citi may need to right off another $18.7 billion in the fourth quarter, exceeding earlier estimates of $8 to $11 billion. The actual total may be even greater than this based on some simple math. Citi holds some $43 billion in CDOs with subprime mortgages underlying them. At this point, these derivatives are trading best case for 43 cents on the dollar; many are down near 22 cents on the dollar. A simple calculation of 57% of $43B shows that $24.5 billion of bad CDO investments will still need to be written down. Not all of this will occur in the fourth quarter, but to properly mark the books to market the greater part of it must.

The totals may even be worse, Citi has an additional exposure of $12 billion to subprime that is non-CDO. Additionally the bank will be fortunate to hit a peak salvage value of 43 cents per dollar on these investments; many will go for below 30 cents in the current crunch.

This makes it likely that Citi will need to significantly cut its dividend and seek additional outside investment from sovereign funds to bulk up its capital ratio to regulatory minimums.

The banks are still running red, and the impending credit card meltdown is not included in the tally yet. A number of notable Hedge Fund managers were quoted this week saying that Citi was a buy at $5 per share, a mere 83% tumble from the current share price.

Citi May Write Down $18.7B, Analysts Say