Citigroup (C): A Promise Broken

April 30, 2008 by Douglas A. McIntyre

The promise from Wall St. firms was implied, not spoken. The heads of operations like Morgan Stanley (MS) and Merrill Lynch (MER) said that the worst was probably over in the credit markets. It was OK for mortgage companies like Washington Mutual (WM) to raise money, but the big banks and brokerages could get by with better risk management and through selling some assets.

Merrill sold some bonds recently to put a tiny amount of meat on its balance sheet. The move almost went without notice.

That was not true when Citigroup (C) said it would sell $3 billion in new equity. As The Wall Street Journal points out “The move comes barely a week after the New York bank raised $6 billion in the credit markets.” With Citi’s market cap down to $138 billion all this fund-raising is costing current shareholder a bunch.

Raising capital not only implies that things have been bad; it indicates that things could get worse. Citi is saying, without any subtlety, that it does not have any confidence in a short-term recovery and that the next few quarters will bring more write-offs.

Astute investors will be keeping their eyes on the rest of the money center banks and large brokers. If two or three more have to go into the capital markets for cash, it is time to run for the hills.

Douglas A. McIntyre