Sanchek
10-24-2009, 01:56 PM
It's beginning to sound like Citigroup, specifically Citibank, is on the ropes worse than most people suspect.
Shutting down lines of cards: http://www.businessinsider.com/citi-abruptly-shuts-down-gas-linked-credit-cards-2009-10
Doubling rates on cards for people who have solid credit scores: http://www.businessinsider.com/citi-customers-reach-out-to-us-2009-10
This guy (who is often insightful) interprets the signs as Citi being on the brink: http://market-ticker.denninger.net/archives/1537-Hisssss-Citibank-Overpressure-Warning.html
Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!
Why do I believe this is a plausible, even likely explanation for this behavior by Citibank? That's simple: This sort of "terms change", which is an effective declaration of default even against those who haven't defaulted (see above; the same 30% rate is being applied to defaulted and non-defaulted accounts!), will drive two consumer behaviors that could ultimately destroy Citibank's credit card business and perhaps the bank as a whole:
1. Those who can transfer balances out somewhere else and/or pay them off will immediately do so. Nobody is going to pay a 30% interest rate and an imposition of default rates on non-defaulted balances willingly and on purpose unless they have no other choice.
2. A significant number of people, on receipt of this notice and understanding what it means (a declaration that non-defaulted accounts are being charged the same penalty rate as a defaulted account!) will immediately go out and charge up the entire unused balance on their card and then intentionally default.
While the latter is technically illegal there's not much that can be done about it, especially if you're unemployed (and 20% of America's workforce is!) You can't get blood from a stone, no matter how hard you squeeze. Indeed, while I do not and will not advocate unlawful behavior there comes a time when one must recognize and understand it, even if one can't condone it. This would be one of those times.
Both of these "results" have a high probability of decimating Citibank's card business and the latter behavior could literally blow them up. That the firm is willing to risk this outcome - an outcome that, to me at least, appears to have a very high probability - means that Citibank has to be crazily-desperate and willing to place an "all-in" bet that they will be able to either (1) book unpaid "interest" as "earnings" and "assets" (much as banks did with negative amortization loans) prior to final disposition via bankruptcy for those consumers or (2) there are enough people who both can't pay off or transfer the balance AND can continue to pay to make this strategy worthwhile even given the intensely negative public opinion reaction this move is guaranteed to generate.
In short, this looks to me like a "Hail Mary" pass. So long as this remains a Citibank-only story my interpretation is that Citibank is in a lot worse financial shape than is being let on - perhaps poor enough that they're at risk of imploding anyway, "too big to fail" or not.
Doesn't sound like a good time to be holding Citi stock.
Shutting down lines of cards: http://www.businessinsider.com/citi-abruptly-shuts-down-gas-linked-credit-cards-2009-10
Doubling rates on cards for people who have solid credit scores: http://www.businessinsider.com/citi-customers-reach-out-to-us-2009-10
This guy (who is often insightful) interprets the signs as Citi being on the brink: http://market-ticker.denninger.net/archives/1537-Hisssss-Citibank-Overpressure-Warning.html
Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!
Why do I believe this is a plausible, even likely explanation for this behavior by Citibank? That's simple: This sort of "terms change", which is an effective declaration of default even against those who haven't defaulted (see above; the same 30% rate is being applied to defaulted and non-defaulted accounts!), will drive two consumer behaviors that could ultimately destroy Citibank's credit card business and perhaps the bank as a whole:
1. Those who can transfer balances out somewhere else and/or pay them off will immediately do so. Nobody is going to pay a 30% interest rate and an imposition of default rates on non-defaulted balances willingly and on purpose unless they have no other choice.
2. A significant number of people, on receipt of this notice and understanding what it means (a declaration that non-defaulted accounts are being charged the same penalty rate as a defaulted account!) will immediately go out and charge up the entire unused balance on their card and then intentionally default.
While the latter is technically illegal there's not much that can be done about it, especially if you're unemployed (and 20% of America's workforce is!) You can't get blood from a stone, no matter how hard you squeeze. Indeed, while I do not and will not advocate unlawful behavior there comes a time when one must recognize and understand it, even if one can't condone it. This would be one of those times.
Both of these "results" have a high probability of decimating Citibank's card business and the latter behavior could literally blow them up. That the firm is willing to risk this outcome - an outcome that, to me at least, appears to have a very high probability - means that Citibank has to be crazily-desperate and willing to place an "all-in" bet that they will be able to either (1) book unpaid "interest" as "earnings" and "assets" (much as banks did with negative amortization loans) prior to final disposition via bankruptcy for those consumers or (2) there are enough people who both can't pay off or transfer the balance AND can continue to pay to make this strategy worthwhile even given the intensely negative public opinion reaction this move is guaranteed to generate.
In short, this looks to me like a "Hail Mary" pass. So long as this remains a Citibank-only story my interpretation is that Citibank is in a lot worse financial shape than is being let on - perhaps poor enough that they're at risk of imploding anyway, "too big to fail" or not.
Doesn't sound like a good time to be holding Citi stock.