Citibank, Value Mirage 2/27/2009

So its official, The US Government has been convinced by the failed Banking Senior Executives that breaking up Citibank in orderly liquidation is NOT they way to go. Instead, to allow the bank to meet its capital requirements , (set by the US Government) a portion of the US Government loans will now be converted into equity and enable Citi to retain capital requirements. No surprise this comes on the last business day of the month. I am shocked bank stock investors missed this and are now forced to sell positions.

Rumors abound concerning the conversion rate (at a 30% premium to the closing price). Also that the US government is requesting (forcing) many other Intl. and domestic lenders to convert as well. Its worse than this actually.

The truth is the conversion rates and amount of conversion were determined not by valuation, but BY MATH. It leaves additional equity on the table giving the Government and Citi's lenders the ability to convert more debt in the future to save Citi's balance sheet and liquidity requirements.

The ripple effect is going to be significant today and Monday. Watch for big "positive" announcements coming out of the Government talking heads this weekend to stave off a further sell off, especially from China and Hong Kong who didn't get a chance to trade on this information (their markets are already closed for the weekend).

Its a sad state of affairs. CitiBank is NOT INFRASTRUCTURE. Citibank is not a required investment by the government. This continued funding is being perpetuated for one reason - its failure would force all equity investors in bank stock and financial stocks to sell their positions to fair value. I estimate fair value of the World Financial system to be at 25% of current values. Why? An extremely savvy, long term Banks and Thrifts only investor who began selling his fund's positions (not buying any new shares in banks) more than 5 years ago tells me that Banks' values must trend to 1.0x book value. And that's for stable Banks. Look at where the industry is valued now: 1.5x.

Value is built by protecting and investing your company's infrastructure. That may be people, that may be technology, that may be trucks or machine tools. Constant monitoring is needed to be certain your company's strategy is being supported by your infrastructure. Speculation is Risk. But so is spending on non-value producing infrastructure. The Government just spent money on non-value producing infrastructure - before it was a loan, now its pure speculation.
Its over for Citi. Don't let the same happen to your enterprise.

Build value every day.

Brad van Siclen