Citigroup, America’s Northern Rock

Citigroup (NYSE: C) continues to hemorrhage capital as fast as it can raise it. The good news last week is that America’s largest bank “only” lost US$5.1 billion in the first quarter, which was less than the vaunted analysts had expected. Less good, Citigroup wrote down US$16 billion in assets.

Worse for the bank and those investors brave/oblivious enough to recapitalise it is that you could not pick a U.S. bank more exposed to the housing and retail busts unfolding. Citigroup has reported some US$40 billion in losses already, more than even the bumbling UBS in Switzerland.

One begins to wonder how Citigroup-faced with mounting losses and forced to beg for new capital to stay above regulatory requirements-has lasted this long. Investors with deep pockets-at the prodding of the U.S. Treasury Department-have been happy to give the bank big new chunks of capital, which just as quickly go down the housing black hole.

How many lifelines does a bank get? When it’s as big as Citigroup… probably as many as it needs. Citigroup is America’s Northern Rock, much too big to fail. But that doesn’t mean we’d want to be a shareholder.

Keep an eye on the existing and new U.S. home sales data that comes out this week, too. A parade of CEO’s on Wall Street took to the airwaves last week to announce the end of the credit crunch. But then you’d expect them to say this, considering it’s their credit (and assets) that are getting crunched.

Home sales can’t have improved by much in the U.S. And if they are worse than expected, the turnaround investors who are loading up on home builders, banks, and brokers may be in for a rude surprise.

This is how it has to be in a bear market. Buyers have to have enough nerve and optimism to buy in the face of an obvious decline in business conditions. Only when they capitulate will it be time to buy, and that could be years.

The U.S. dollar was slightly up against the euro and the yen to close last week. But pay it no mind, we reckon. The dollar had just made a record low against the euro at US$1.59. European money many Jean-Claude Juncker warned market participants that the G-7 was serious last week, really really serious, when it talked the dollar up.

Seriously. We’re serious. We mean it. Really.

Market participants showed what they thought of that by bidding oil up to US$116 on the NYMEX. Oil will correct sooner or later. And the dollar will rally some against the Euro. But in the grand scheme of things, investors still consider tangible assets and resources as superior alternatives to owning particular national currencies (especially dollar-denominated stocks and bonds).

That can change for two reasons. One, traders in oil and real assets will take profits and sell. The second reason is that the “authorities” will eventually do everything they can to punish investors who put their money in commodities. Raising margin requirements in the futures market is one way to do it. Another way is to raise the political heat on hedge funds, which will probably be blamed for rising food prices. Hedge funds don’t kill people though. It takes a government to do that.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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