Goldman Says Sell Citi

The days following Bernanke's Halloween rate cut seemed filled with subprime fatigue. The crisis was over, the banks had wrote down their debt, the story was coming to an end.

Happily, Bloomberg.com put out an article about Goldman Sachs downgrading Citigroup to 'sell' from 'neutral'. You can read it here.

Goldman's analyst predicts that Citi's Collateralized Debt Obligations (CDOs) may add up to $15 billion over the next two quarters.

CDOs are securitized asset backed securities. If this sounds like a science projects, read my earlier blog "What are CDOs Anyway?" here.

The important news here, however, is that Citi, Merrill and all the rest are still knee-deep in the subprime.

CreditSights Inc., an independent research firm, said today that UBS AG may have ``substantial'' losses on $20 billion of collateralized debt obligations with the highest ratings. UBS, Europe's largest bank by assets, reported its first quarterly loss in almost five years on Oct. 30 after the U.S. housing slump led to about $4.4 billion in writedowns on fixed-income securities.

Citigroup's CDOs account for 25 percent of book value and 50 percent of tangible book value, compared with 20 percent for both those measures at Lehman Brothers Holdings Inc., Bear Stearns, JPMorgan, and Morgan Stanley, Tanona said. The bank's retail banking and credit card business may suffer as consumer-credit conditions worsen, he said.

If you thought the subprime was over, read the block quote again.

Consider this from a personal investor's perspective: Citigroup has book value per share $25.479. A quarter of that, approximately $6.37 per share, is invested in rocket science inventions like CDOs which are swiftly losing value.

Essentially, a quarter of the company's book value comes from risky assets that are vulnerable to fluctuations in the credit markets, and have an amplified leveraged exposure to volatility of the underlying assets.

Investing in this line of business is not for the faint hearted, which is why Goldman has downgraded Citigroup to sell.

For subprime crisis spectators, however, this is an indication of exciting times ahead. With 25 percent of book value in CDO's, sliding share prices and analyst downgrades will be the least of Citigroup's trouble if credit market turbulence is on the horizon.