Surprise, surprise. Citigroup is not quite as healthy as they would have us believe.
According to media reports early Monday, Citigroup management has reached out to the Feds for more help. Turns out that their asset levels as measured by TCE (Tangible Common Equity), and maybe other measures for all we know, are lacking. The shoe is dropping as we speak.
US futures moved higher when the news broke during the Monday session in Asia. Relief rally? Perhaps at last the truth is coming out that some of these storied financial firms are more story than fact. More hope than solvency. And the markets are exhaling in a sigh of relief.
It's never good news to see capital value wiped out, trauma in the financial markets, and grand companies with great traditions erased like so many misspelled words. But the hard reality is, Citigroup is just about nationalized. And that creates a whole new set of challenge for the U.S. Government.
Nationalization, or at least more capital investment, clearly puts the U.S. in the co-drivers seat of running a large institution. And political leadership is not the best guiding force for a profit-making venture.
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With a higher equity stake and the guarantees previously pledged, the U.S. now extends its already stressed balance sheet even more. (That's probably why Hillary Clinton was imploring Asians to keep buying Treasurys during her China visit --there's concern about the size of the debt). And debt like this creates higher deficits that will eventually pass through the economy and lead to higher interest rates. So there are risks in exposing the U.S. taxpayer to more and more debt through equity investment in these damaged firms.
But at least we can say that truth is emerging. Some companies have problems that must be dealt with. Facing the hard facts is a positive step. And perhaps that's what we've all been waiting for. Until we swallow hard and see what truly is, we will not move forward.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of the firm and has over 20 years investment and financial planning experience. Michael is a respected lecturer speaking frequently on tactical asset allocation theory and appears regularly on CNBC and CNBC Asia. Michael can be reached directly at firstname.lastname@example.org.