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Citi Underpins Consumer Struggles


Citigroup's latest earnings release is truly staggering.

Despite the forewarning and abysmal expectations for Citigroup's (C) latest earnings release, the fourth quarter numbers are truly staggering. Remember these are numbers for three months:

  • $17.4 billion in subprime-related writedowns
  • Net loss of $9.8 billion or $1.99 per share compared to net income of $5.3 billion or $1.03 per share in 2006
  • 70% Decrease in revenue to $7.2 billion from $23.8 billion a year ago
  • Dividend cut 41% to 32 cents per share from 54 cents which will save the firm $1.1 billion per quarter
  • $12.5 billion issuance of preferred stock, of which the Government of Singapore will buy $6.9 billion
  • 4,200 job cuts

Not to be outdone, Merrill Lynch (MER) announced a capital infusion of its own, issuing $6.6 billion in preferred stock to strengthen its balance sheet in advance of its fourth quarter earnings release Thursday. The announcements bring the total capital infusions in the past two months to more than $20 billion for Citigroup and almost $13 billion for Merrill, most of which has been purchased by foreign investors.

Professor Depew is likely spending the morning poring over the earnings transcript looking for signs of further consumer duress. He may point to the $4.1 billion in loan loss previsions on Citi's consumer loan portfolio as evidence of mounting pressure on credit card payments.

Our resident banking expert Minyan Peter was skeptical Citigroup's initial batch of writedowns would be its last and examined how the manner in which companies sell pieces of themselves indicates our position in the credit cycle.

Foreign Direct Investment used to flow outward from the West to the rest of the world, but this trend has reversed itself and Professor Tatro explores the potential implications of this shift in capital flows.

In many ways, Citigroup is representative of the American consumer, lulled to sleep by years of unprecedented prosperity while it ignored a ballooning balance sheet supported by fewer and fewer real dollars of income. Though its subprime losses were certainly the catalyst for the recent management shakeup and capital restructuring, Citigroup and the consumer's current struggles underpin something much more fundamental about the sustainability of debt-induced expansion.


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