Thursday, November 20, 2008

Now That's Leverage!

"Tangible assets, which don't include goodwill or intangibles, are 55 times the bank's tangible equity .... Citi's leverage worries some investors. Furthermore, possibly making matters worse are proposed accounting-rule changes that, if adopted, will prompt banks in 2010 to bring some off-balance-sheet assets back onto their books.

Tangible assets rise to nearly 59 times tangible equity if Citi has to bring about $120 billion in credit-card assets back onto its books in 2010, as is likely. Citi also may have to consolidate some of the roughly $670 billion in mortgage assets currently held by off-balance-sheet vehicles.

If the bank had to consolidate just 20% of these mortgage assets, tangible assets would rise to about 63 times tangible equity.

Reilly, David. 2008. "Job Losses Won't Cut It for Citigroup." Wall Street Journal (18 November): p. C 10.


Daro said...

During the 2 years I worked in Citi the traders (all 53 of them) made about $5000 profit total/day. And that was the treasury/FOREX floor which should've made money almost automatically on the yen carry trade as well as commissions off of trades coming from "premium" customers.

I'll pretend to ignore the group of extremely unsavoury characters that swaggered about the building for about 6 months living in the penthouse suit with tattoos on their arms and necks, dressed in soccer shirts and sporting very working class accents who seemed to have no business there...

The only qualifications Chuck Prince had before being CEO was to be Sandy Weil's personal lawyer. He managed to walk out with a $60Million bonus despite losing the company $10Billion. Citi never failed to give me the creeps...

Anonymous said...

I'm one of the unlearned. Would someone make it a bit clearer what the ditinction is between tangible assets and tangible equity.

Daro said...

Allow me to screw up first:

There's differences between the layman's version and the technical version:

Assets are physical or intellectual goods such as property or patent rights that have some tangible value. Stocks can also be considered assets by people who own them (given the current market price).


for equity, the dictionary says: An accounting term used to describe the net investment of owners or stockholders in a business. In an accounting equation, equity also represents the result of assets less liabilities.

So stocks could be assets AND/OR equity?

Lets just say stocks are considered an asset to the homeowner who holds them but the equity they really represent to the owner is the company's assets minus its liabilities divided by the number of shares, multiplied by the number shares he/she owns..

(done on only 3 scotch & cokes...)

Anonymous said...

Three words: obsolete business model. The Fed should just go retail. We don't need the middlemen. Citibank is where was five years ago. Citibank just had more assets on their books up front so they could hide it better.

Anonymous said...

Thanks Daro. You describe what I thought was the distinction, but then I'm confused by the original post. I note that Perelman makes no mention of liabilities, so my confusion may be the result. If Citi has tangible assets that are 69 times equity, what's going on? How can the total value of the outstanding stock be valued so far below the corporation's asset value.
Again I note that there is no mention of liabilities. Should one assume, therefore, that outstanding liabilities may be 70 times greater than tangible equity?
Otherwise, why aren't we all buying Citi if its assets have such greater value than the aggregate stock price?