Citi’s dirty pool of assets

August 12, 2009

Hard as it may be to believe, shares of beleaguered Citigroup are on fire.

The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March.

The over-caffeinated stock maven Jim Cramer keeps calling Citi a “buy, buy, buy” on his nightly CNBC television show. Even the more sober-minded writers at Barron’s are pounding the table a bit, predicting Citi shares could double in price in three years.”

Time out! It’s far too soon for anyone but stock flippers and fast money hedge funds to buy Citi right now.

That’s because there’s still a world of hurt for Citi in the $83.2 billion in subprime mortgage-backed securities, corporate loans, home loans and commercial real estate mortgages that the bank’s finance team has stuffed neatly into something called the “Special Asset Pool.”

But there’s nothing special at all about these assets. This cesspool of toxic securities and floundering loans is the worst of the stuff that’s been stinking up Citi’s balance sheet.

And these rotting securities and loans represent a good chunk of the $300 billion in problem assets the federal government is guaranteeing under its bailout of the giant bank.

Yet what the cheerleaders for Citi sometimes forget is that the struggling bank must absorb up to $39.5 billion of the “first loss” on those troubled assets. To date, Citi says it has incurred $5.3 billion in losses on this pool of toxic assets — meaning the bank has another $34 billion in losses to soak up before the taxpayers start footing the bill.

And the way things look today, Citi is looking at a good deal more losses to come from its Special Asset Pool.

For starters, Citi still sits on a rather sizable portfolio of subprime-backed collateralized debt obligations — the dubious securities that helped spark the financial crisis.

At last count, Citi valued its CDO portfolio at $9.6 billion, a 56 percent decline from the value the bank placed on those securities last summer. To protect itself against a potential default on those CDOs, Citi has hedged its exposure with some $4.5 billion in credit default swaps.

But unfortunately for Citi, it didn’t buy those insurance-like derivatives from American International Group, another big bailout recipient.

If Citi had been shrewd enough to have done business with AIG, it would have been able to sell its CDOs at face value to an entity set up by the Federal Reserve, just like Goldman Sachs, Deutsche Bank and Merrill Lynch and other big banks did. In a flash, Citi’s CDO problem would have disappeared.

Citi, however, had the misfortune of purchasing its CDS from Ambac Financial Group, a bond insurer that many see as being on its last legs. The bond research firm CreditSights says Ambac “may run out of capital sometime in 2013.”

Many others think Ambac’s demise could come much sooner. On August 7, Ambac, which trades around $1, reported a larger than expected $2.4 billion second-quarter loss.

A collapse of Ambac would render the CDS that Citi holds on its CDOs all but worthless. (For related news click here).

To date, Citi, which declined to comment on its CDO exposure, has written down the value of those insurance-like derivatives by more than $1 billion, according to regulatory filings.

Even if Ambac survives in some fashion, Citi is likely looking at additional write-downs on those contracts, and potentially on the underlying CDOs they are supposed to insure.

Citi also could take more hits on some $6.2 billion in private equity investments and $8.5 billion in loans that financed debt-laden buyouts. The bank also reports having some $10 billion in Alt-A mortgages — a home loan that’s a step above subprime — and $8.3 billion in still largely untradeable auction-rate securities.

To be fair, Citi has been aggressive in writing down the value of its $10 billion in so-called Alt-A home loans to $1.7 billion. The bank has been equally aggressive in reducing its exposure to commercial real estate loans. The bank has marked down the bulk of its $28 billion in commercial real estate-related assets to $5.1 billion.

So it would require substantial defaults in both categories of loans for Citi to incur large losses.

But to say Citi isn’t going to suffer any more losses in this pool of toxic assets is way premature. And none of this analysis has focused on the $183 billion in loans to cash-strapped consumers on Citi’s books that could still go bust.

In short, the safest bet on Citi shares is still a short one.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

The rules have changed at least temporarily and when it’s time, they’ll change them back. But right now there are stocks with unbelievably low P/E’s and likewise high EPS numbers that are just sitting there waiting so what good does it do you to wait on them and miss this? These times are hard for the traditional numbers guys because it’s name recognition, hope and speculation time. AIG?

Posted by BobF | Report as abusive

[...] Citi’s dirty pool of assets – NOT the Jim Cramer “buy, buy, buy” version of analysis (Reuters Commentaries) [...]

Basicly they are just cooking the books, US is broke.

Posted by Miha | Report as abusive

The real meltdown hasn’t even started yet. Brace yourselves, people – the dirt that’s been swept under the carpet is almost about to spew. It’s gonna make the 30′s look like a holiday in comparison.

Posted by Travis Lyle | Report as abusive

TOAST is exactly what is happening at THIS and LIFE :(

Posted by CRed | Report as abusive

what insanity are you peddling – may be you should keep your idiotic comments to yourself – go suck on something

Posted by balug balu | Report as abusive

Denial is the most powerful tool in the U.S. corporatist lexicon. Maybe if we close our eyes long enough, these problems will go away. Or just maybe we get 15 years of virtual recession as Japan did after its real estate bust of the 80s.

The denial, however is allowing the corporate pirates to skim up the last dregs of the American economy as “bonuses” subsidized by the taxpayers. This would be comical if it were not so completely tragic.

In the old days, they would tar and feather these financial “wizards” and ride them out of town on a pole. Even earlier, their heads would be on a pole. Is this how far we have to get before this blatant corruption is reigned in? God help us if the answer is yes.

Posted by Jonathan Cole | Report as abusive

Citibank’s dirtiest assets remain the ones running the place, along with those in public office who keep handing Citicarneys the American taxpayer’s wallet.

When it comes to credibility they’re all seriously overdrawn.

Posted by The Bell | Report as abusive

[...] Citi’s dirty asset pool 9:42am ET [...]

It is not the dirty assets, it is the leadership, both at the business and the government level that troubles me most. All actions have to be accounted for, sooner or later, and one can be thankful when that accounting comes sooner. From what I see we have a true credibility gap at the business and government sectors. This will result in failure. It is inevitable.

Posted by f belz | Report as abusive

[...] The great interest rate rip off Commentaries Blog Archive Citi’s dirty pool of assets | Blogs | [...]

“legacy loans” to ponder. Very clever. You can’t get much more benign than that. Now from Citi we get “special asset pool,” SAP for short, which is exactly what these assets will do the strength of Citi (what strength is left anyway). What puzzles me is why these folks don’t realize the games they play with words make them look rather foolish. Maybe they need to read or reread Orwell’s “1984.”

Posted by Amandus Colver | Report as abusive

I only posted the last half of my comment. Sorry about that. Here’s the whole thing:

You’ve got to chuckle at the use (or misuse) of the English language that comes out of the Washington-Wall Street cabal. From Mr Geithner, we got “legacy loans” to ponder. Very clever. You can’t get much more benign than that. Now from Citi we get “special asset pool,” SAP for short, which is exactly what these assets will do the strength of Citi (what strength is left anyway). What puzzles me is why these folks don’t realize the games they play with words make them look rather foolish. Maybe they need to read or reread Orwell’s “1984.”

Posted by Amandus Colver | Report as abusive

Well, this is what happens when you flood the world markets with fiat currency–the markets inflate. It’s got nothing to do with the underlying health of the U.S. economy–the United States is still broke, and Citi and other banks still have toxic assets on their books. When will the people in this country understand that CRIMINALS are running the show here in the United States? What will it take? I’ll tell you one thing, the health-care protests are a GREAT sign, because they had nothing to do with health care, and everything to do with the U.S. populace revving up to revolt. Democrats and Republicans are two sides of the same coin, which means that the American people DO NOT HAVE A CHOICE. When they finally understand that en masse, they will respond with force. Time will tell….

Posted by Gary | Report as abusive

[...] Citigroup is still sitting on top of a mountain of toxic assets.  (Matthew Goldstein) [...]

Why is a journalist commenting on the strength of Citigroup?!? The only reason may be because we are all shareholders now but dont we want the stock price to go up so the Government can scale out of the stock and reap a profit for us?!?! Their is no reason why Citi should be down so much and others (like BAC) are way up. The economy is recovering…giving less exposures to ALL OF THEIR RISKS…smart investors know that so they are buying again which will push the price north.

Dont hate, you SHORTER!!!

Posted by Travis | Report as abusive

[...] Citi’s dirty pool of assets Post a comment (14) [...]

The short interest in Citi is an amazing 22% of shares outstanding. There is certainly a lot of money betting the stock will slide … and this is reflected in a host of negative comments on many message boards, forums, and even here. Citi is in just as bad shape as Goldman, BofA, and so on. But the govt. has already signaled they are too big to fail. You short sellers better cover your bets. This stock is going up.

Posted by Jimbo | Report as abusive


Posted by JAY BOOLAAH!!! | Report as abusive


Is it just me or does an inability to use lower case suggest an other than supple mind?

Be sure to check in with earth in December, Jay, and let the locals know how you’re doing.


Posted by Jay Is Not Silent Bob | Report as abusive

CITI is not going to crash, and probably will rise, but not to $12 anytime in the next 5 years. They said it’s too big to fail, and put good money in to making that the reality. Playing with accounting rules is small time compared to the political fallout from a collapse. With tax money and flexible accounting all things are possible.

Posted by Xenophon | Report as abusive

jay boolaah… I have a CITI MORT loan they just lowered my paymt from 575.00 to 336..40(aug to dec) my home value has droped from 67,000.00 too 58,000.00 with the county…oh my loan is for 76,000.00!!! they willl not right down the loan. what due you think will happen after dec?? I lost my job that paid 15.00hr now My new job pays 10.00 ..tee

oh .p.s see my other notes citi lowered my payment by lowering my interest rate to 3.00% but will not lower it for good to.. oh 5.00% so I can keep up with my payments would that not work better for the company and me so they would not need to take the house>>>tee

Posted by tee | Report as abusive

[...] situation disturbing: RBI Governor SubbaraoCitigroup is still sitting on top of a mountain of toxic assets‘The World Is in Trouble’: Deutsche Bank Chief [...]

[...] move them to a separate unit and pay them off gradually, like we saw citigroup do, and considered a great success. Here's a bit more expansion on that [...]