Citigroup: Lessons from the Crypt

This post is from Michael Yoshikami, President and Chief Investment Strategist of YCMNET Advisors, a wealth management firm:

With the announcement that Citigroup is being rescued by the U.S. Treasury, the FDIC, and the Federal Reserve, a long journey has ended for this fabled financier. Citi has now agreed to government regulation which will forever alter this once proud institution.

In New York where I'm writing this, the mood at Citigroup is one of relief and resignation that their world has forever changed. Who would have thought!

What lessons can we learn across the globe as we watch Citigroup fall under the Federal government’s umbrella? Are the lessons the same in Asia? America? Everywhere?

Indeed they are! They are universal truths we can all profit from. Understand these lessons and it will help you navigate your way through today’s treacherous environment.

  1. Do not underestimate the downside for any investment. Citi hoped real estate markets would not fall. They hoped we would not fall into a recession. They hoped that the consumer would spend forever. Now they are paying the price for unbridled optimism. Examine every investment you make and ask yourself this simple question: What can go wrong and can you live with the pain? If the answer is no, get out.
  2. Leverage can be dangerous. Use at your own risk. Citigroup has many great businesses generating hundreds of millions of dollars of revenue, but like AIG , a few decisions left unchecked by risk controls brought the entire company to its knees. The reason for the dramatic impact -- leverage was involved. Anyone who has ever faced a margin call knows what leverage can feel like when it goes against you. So Be Careful: Leverage can take you down a nightmare path and unwind every other profitable investment in your portfolio.
  3. Face reality and run from denial. Looking at the truth about your current situation is important if one wants to survive these volatile times. Believing your own marketing and chants that "everything will be okay" is a recipe for disaster. Here’s a simple question to ask: If you had cash to invest today, would you buy that same investment? If the answer is no, then it's time to take another look at whether you should be in that position. I'm sure there are a few assets that Citi wished it didn't own. According to news reports about $300 billion worth.
  4. Learn to swallow hard and take action. In a previous column on, I mentioned how important it was to not be like a deer in the headlights. Inaction rarely makes problems go away. Take discomfort in the chops and face reality. Facing the truth now is far better than waiting until you are forced under dire circumstances to see reality.

Citigroup did many things right this weekend. And with this capital injection, they hopefully, will get back on track. I’m rooting for them despite the mistakes they’ve made.

But here’s the difference between Citigroup and you: Your government -- whether it’s China, Australia, a European country or the United States – does not consider you too big to fail.

Making Citigroup’s mistakes will cause you more pain than even Citi shareholders. Follow these suggestions and it will provide a good foundation for investment success.

So in the end, maybe the Citigroup debacle has some winners after all. We can learn from their errors and hopefully they will as well. Three cheers for lessons learned. It’s the silver lining in any investment disaster.

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