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Friday, October 23, 2009 7:53 PM

Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble

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Citigroup is in serious trouble. It's easy to tell by what they are doing.

Inquiring minds note that Citi Abruptly Shutting Down Gas-Linked Credit Cards.

Citi (C) is abruptly shutting down credit cards linked to gas station partners.

The bank is offering few details:

The bank said in a statement it "decided to close a limited number of oil partner co-branded MasterCard accounts." That includes not only Shell, but Citgo, ExxonMobil and Phillips 66-Conoco cards.

The close date was Wednesday, and letters were sent out Monday to customers informing them of the change, a Citi spokesman said. The bank would not say how many cards were shut down or how much available credit they represented.
In a followup article the Business Insider notes ....

Citi Jacks Credit Card Rates To 29.99% On Unsuspecting Customers.
Yesterday, we reported on how scores of people across the country had found their gas station-linked credit cards from Citibank had been canceled.

One reader, Rachel, emailed us and explained her frustration.

I received two letters by mail from Citibank yesterday. One said that because I always paid my account on time and that I was such a great customer they were increasing my credit limit. The next letter I opened stated that Citibank was raising my interest rate from the current 18.99% to 29.99%.

My husband and I have good credit and are making a genuine effort to get out of debt by purchasing next to nothing on credit.

While I am ashamed to admit this to you we owe $25,000 to Citibank, our choices at this time are very limited. I have made some calculations and in order to pay the balance before they forcibly close my account, my husband and I must make payments of $1400 per month, this is a substantial increase from the minimum balances they require of $665 per month. I have not opted to pay Citibank the 29.99% interest. ...
Now admittedly having a $25,000 balance is a sign of a problem. On the other hand, the account seems to be in good standing, so let's dig further.

Citigroup Pressure Builds

Karl Denninger gets straight to the heart of the matter in Hisssss (Citibank Overpressure Warning?)
Citibank's average yield year-to-date (consumer and plastic) was about 12%. But they're suffering 10% defaults, making their true margin about 2%. That's still a positive number.... if it's accurate.

This spread, of course, has a lot to do with previously-issued fixed-rate 12.99% cards (they and everyone else had a lot) that were handed out like candy to everyone and their brother, frequently with $10,000, $20,000 or even $50,000 credit lines.

Huge numbers of small business owners - especially sole proprietors - use these cards as a means of financing operations. They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding.

I have since confirmed that this letter is not just going to people who have had credit "challenges". Indeed, this appears to be a blanket change on the part of Citibank. I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation - the "paragon" of so-called "responsible" credit use. All of the letters are identical.

The problem should be obvious - for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense. Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases. If you're anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.

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!

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.

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.
In case you missed it, please take a look at Karl's post from yesterday Recovery? How, Given THIS? where he showed some nice Citigroup statistics and an actual "jack letter" from Citigroup to its customers.

Here is the key paragraph in all of these articles.

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!

Ding! Ding! Ding!

We have a winner. Citigroup needs money, and needs money badly. Moreover, there is no reason to believe this is all credit card related. In fact, there is every reason to believe Citigroup (and other banks) are in trouble on multiple fronts.

Citigroup's Shadow Assets

Citigroup is still stuck in $800 billion in off-balance-sheet SIVs of highly questionable value. That's exactly why it's Not Practical To Tell The Truth.
The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.

FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting.

"We need to get a new standard into effect," Linsmeier said, though "it's not practical" to begin requiring companies to put assets underlying securitizations onto their books this year.

Enquiring minds may wish to consider Citigroup's $1.1 Trillion in Mysterious Shadow Assets.

If Citigroup is looking for an award, it can take the blue ribbon for greed, arrogance, and stupidity in the off balance sheet category. There are plenty of other categories and more blue ribbons will be awarded. Nominations are being taken now.
At the time I penned that, Citigroup's shadow assets were $1.1 trillion. They are now down to a mere $800 billion or so.

Note that the FASB voted to postpone mark-to-market until Nov. 15, 2009. That time is approaching, but have no fear. The FASB has postponed mark-to-market rules once again.

The reason is obvious: It's Still Not Practical To Tell The Truth.

Mike "Mish" Shedlock
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