Market Assuming Citigroup (C) Will Go The Way Of AIG (AIG) Or Wachovia (WB)

The market is treating Citigroup (C) as if it knows something about the bank’s near-term fortunes and that something is not good. Shares in the bank have been off 21% to $6.60. What is remarkable is that the stock traded over $10 just four days ago.

Citi’s announcement that it would acquire the remaining assets of the SIVs it manages at current fair value should not have caused the drop. If the contents of these were remarkably toxic, Citi would have disclosed that.

The firm’s decision to fire 53,000 more people is unfortunate, but it would usually be a modestly positive piece of news.

The only real explanation for the drop is that traders believe that Citigroup is headed in the direction that Lehman, AIG (AIG), and Wachovia (WB) did. The market lost confidence in these stocks because their weakened balance sheets were causing larger and larger write-downs, undermining their capital bases. This was causing customers to take capital and move it elsewhere.

Citi now appears to be in the same flat spiral. If so, before the end of the week the Fed and Treasury may ask the board of directors over to the offices of  The New York Federal Reserve. Someone from the FDIC will be in that meeting as well.

The conversation will be simple, and one-sided. Citi will be told it has a day or two to find a buyer. The FDIC may be willing to guarantee the value of some of the banks assets, if the right acquirer steps forward. Or, absent another financial firm wanting Citi, the government will step in with $100 billion in loans and own 80% of the bank.

What else could it be?

Douglas A. McIntyre