Friday, December 14, 2007

Citigroup Adds SIV's to Balance Sheet: So What?

Am I the only one who just does not see the big deal here?

Citigroup (C) announced it is bringing $49 billion in assets onto its balance sheet by adding seven SIV's to the company's ledgers. The SIVs currently have $49 billion in assets, down from $87 billion in August. Like other banks, it has been selling the SIVs' assets recently to ease pressure on the vehicles. Banks such as HSBC (HBC) and Bank of America (BAC), have also sold assets to support their SIVs.

Why is this just not a huge deal? When you talk about Citi, unless you are talking about figures in the hundred of billions of dollars, it just does not add up to much when you look at Citi's near two trillion dollar asset base.

Witness, by bringing the SIV assets onto its balance sheet, Citigroup will see Tier 1 capital ratio, the gauge of the bank's ability to absorb huge losses drop 16 basis points from about 7.3% as of Sept. 30, to 7.14%. While that is below the company's internal target level of 7.5%, it still will remain above regulatory requirements.

Now the usual talk is out there about a dividend cut as Betsy Graseck, a Morgan Stanley analyst said that if the SIV assets were brought onto Citigroup's balance sheet, the company would need to cut its quarterly dividend to 30 cents from 54 cents next year.

Won't happen. Should the dividend get cut, after the board has denied it will and Pandit has supported that with his statements, the stock would get decimated. Will there be asset sales to assure it will not happen? Probably. If one of Pandit's first moves at the helm is to announce a dividend cut, he is dead in the water.

Investors will call for his and the boards heads.... assuming they have some sort of desire for self preservation in their DNA, I will say that avoid that scenario at all cost. It does give the analysts nice headlines every time they come out and say it though...

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