Dateline March 4 2008: Citi Falls on Worries About Cash Levels.

Citigroup (C) shares sank to their lowest level in more than nine years, as stockholders recoiled at forecasts of more losses at the troubled bank and comments from a Middle East fund executive that Citi must raise more cash to stay in business.

Samir al-Ansari, chief executive of the $13 billion government-owned investment firm Dubai International Capital, said Tuesday at a private equity conference that it will take more than the combined efforts of the Gulf's wealthiest investors -- the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal -- to save Citigroup. 

Interesting Statement

That was an interesting statement by Dubai International Capital given the Abu Dhabi Investment Authority provided $7.6 billion in capital in return for a 4.9 percent stake in November 2007. See Abu Dhabi Deal Raises Questions About Citigroup's Health for more details.

Also note that Citigroup had to go back to the well in January, raising $14.5 billion by issuing preferred stock and slashing its dividend 41% after reporting a $14.5 billion loss. See Cost of Capital "Ratchets Up" at Citigroup and Merrill for more details.

Olstein Capital Management Forecast

Dateline March 5, 2008: Olstein Capital Management says Citigroup Shares May Double in 2 Years and dividend is safe.

"Even though there's bad news still to come in Citibank, it's discounted already," said Robert Olstein, who oversees about $1.3 billion as chairman of Olstein Capital Management. "This stock in two years is going to be in the mid-40s. You've got to be forward looking."

"They're not cutting the dividend and they are not going to go back for more capital," Olstein, whose firm owns 1.7 million Citigroup shares, said after U.S. exchanges closed today. "They're OK."

Crystal Ball Is Broken

Olstein's forward looking crysytal ball is broken. "Olstein said in an interview with Bloomberg Television in August that he had been buying shares of Citigroup because the dividend was attractive."

Since then the dividend was slashed by 41% and the stock price has fallen by more than 50 percent.

Citi Tries to Reassure Investors

Dateline March 5, 2008: Citi tries to reassure investors.

"Citi is financially sound - we are well capitalized and extremely focused on the strength of our balance sheet," said the memo sent to Citigroup's 370,000-plus employees after a conference call between Mr Pandit senior managers.

Citigroup Turns To Bond Market To Raise Capital

Dateline March 5, 2008 3:00PM: Citi Turns To Bond Market.

Citigroup, under pressure to raise capital, is making a big bet that it can raise money from yield-hungry investors. It is selling a $2.5 billion bond issue, most of which it is underwriting by itself. Citigroup said it would sell a 30-year issue, underwriting the lion's share -- $2.1 billion, or 84.0% -- itself. The relatively long-term issue has a relatively yummy yield: 6.875% of face value.

If a bond sale cannot be placed with investors, the underwriters -- which in this case is largely the issuer -- end up having to hold the paper. So the strategy contains an element of risk for Citi.

Questions of the Day

• If Citigroup was well capitalized would it run the risk of having to purchase $2.1 billion of its own bonds at 6.875% interest?
• Doesn't this underwriting arrangement raise any eyebrows?

Citigroup Sheds Some U.S. Branches

Dateline March 5, 2008 3:00PM: Citigroup Sheds Some U.S. Branches.

Citigroup Inc. has started shedding clusters of U.S. bank branches in cities where the company has token presences that lag far behind larger players.

Citibank, the New York-based company's retail-banking unit, has agreed to sell its small network of branches in Amarillo, Texas, according to an internal bank memo sent Wednesday to Texas employees. Citigroup is selling the branches to a local lender, Happy State Bank, the memo said. The transaction's terms weren't disclosed.

Citibank also plans to shutter at least 11 other branches around the U.S. in May, according to people familiar with the matter. Six of the branches are in Florida, primarily in the Tampa area. Three other branches are in New Jersey, and one each is in California and Maryland.

The memo said Citibank remains "committed to maintaining and expanding in Texas," which it described as "one of our most important markets."

Citigroup's Commitment To Expand In Question

Perhaps I am mistaken, but selling branches to Happy State Bank does not seem like much of a commitment to expand in Texas. It seems more like a conscious decision to raise capital to me.

It's rare to see predictions like Olstein's fail so spectacularly in less than a day, but there you have it.

What About The Dividend?


Chart Courtesy of the Wall Street Journal

In "Where's Waldo?" on February 22, 2008 I noted that analyst Meredith Whitney was calling for more writeoffs, another dividend cut, and the need for Citigroup to raise more capital. I agree on all counts.

Nothing has changed since then except that Citigroup is now borrowing (or rather attempting to borrow) $2.5 billion at 6.875% while paying approximately $6.6 billion annually in dividends. This is not a viable long term strategy.

Odds are overwhelming that Citigroup will have to cut that dividend again.