The New CITI

It is clear that banks such as Citi and Bank of America were on the brink of collapse during the Great Recession of 2008.

Citi received $45 Billion in Tarp funds and subsequently converted the government's preferred stock into common stock. The government now owns 34% of Citi common stock. There has been a huge increase in common shares outstanding as a result of the combined government and private $58 Billion preferred stock exchange offer. All of the preferred holdings were converted into common stock thereby diluting common shareholders and eliminating the payment of preferred dividends. This conversion has dramatically improved Citi's capital base as it now has a higher tangible book value than most big financial institutions.

Citi has split itself into two banks- the retail and investment bank and Citi Holdings. Citi Holdings consists of the household lending arm and other asset pools of capital. The big question has been whether these so called 'toxic assets' will pay off. Based on tangible book value, Citi is cheap with a strong capital base. It is relying on its' global trading and investment banking business to create profits. Fundamentals have improved as credit quality has stabilized and consumer credit delinquencies have steadied.

Random thoughts....Bank of America is in a similar position as Citi but is stronger because of the acquisition of Merrill Lynch last year....the Dow Jones is down close to 20% in the last twelve months...look for the market to test 9,700 on the Dow and 1100 on the S&P within a few months....September, 2009 will be here in days as people try to forget the Lehman collapse of last September.....remember that the market is a leading indicator and it is pointing to a strong first half of 2010....the real estate market will be on the upswing in 2010 as party talk will include the discussion of 'jumbo mortgages'....

The Great Recession of 2008-2009 has ended

Lehman Brothers filed bankruptcy on September 15, 2008. The world economies and the stock market fell of a cliff within days. Demand totally dried up in every sector of the economy. The stock market dropped about 5,000 points (over 40%) in six months while unemployed skyrocketed. The worry was that our big banks would be nationalized and that we had a chance of another Great Depression. In the winter of discontent, it became clear that we were in a Great Recession. On March 15, Ben Bernanke was interviewed on 60 Minutes (the first time for a Federal Reserve Chairman). The Federal Reserve Chairman was asked when he thought the first signs of recovery would be. Bernanke said, "Well, I think that one sign would be that a large bank is successful in raising private equity."

The Bank Stress tests were announced last Thursday requiring that at least ten banks need to raise more capital. A number of these banks including Morgan Stanley, Wells Fargo, US Bank,

and Capital One have sold $billions of stock successfully in the public market in the last few days. Bank of America and Citi will be able to raise the necessary capital without help from the Government.

This marks the beginning of a new chapter and the end of the panic of 2008-2009.

We are now trying to fight our way out a terrible recession. It is impossible to pinpoint the exact day that the recession will end and when the recovery will begin. The stock market has recovered about 40% of the losses since September 15. It seems to me that Ben Bernanke deserves much of the credit for keeping this economy from getting worse.

Random thoughts....GM still has to finalize its' financing plans...I don't think that they will avoid bankruptcy....look for continued high unemployment through the end of 2009.....my guess is that the economy will grow by a fraction in the 3rd Quarter of this year....Junk bonds have outperformed every investment category so far this year...look for 10,000 on the Dow before the end of the year.....a 5-7% correction could come at any time.....