Feb 4, 2010
Why Bruce Berkowitz bought Citigroup
(Click for video)
The play here looks familiar to other theses that I’m seeing from hedge funds. Namely, that after TARP and the government’s intervention, the worst is over for a company like Citi. It does not have to worry about failing and now, an investor just has to look at their prospects for income generation from newer loans to pay for loan losses:
Michael Breen: Speaking of mulligans, you just bought a firm that probably wish it had one for the past couple of years: Citigroup. Maybe you can let us know how you got comfortable with that, because a few years back, you were speaking about how you couldn’t get transparency on the big banks and the financials.
So is it a case of the blind now being able to see, or have things been shored up to a point that anybody can get comfortable with it? Why don’t you give us the thesis for Citigroup?
Bruce Berkowitz: I think it’s a bit of both. In the U.S., this was not a bankruptcy, but it’s gone through a scrubbing process, very similar to a bankruptcy, by the U.S. Treasury. Citigroup has spent a good amount of time with the U.S. government and many of its financial regulators, going through every liability and asset in the books.
After such a period of time, you normally are able to count the cockroaches. That is, the liabilities have been under a microscope for quite a period of time. There’s been huge capital injections by the government. There’s been a massive amount of dilution to old shareholders. And you’re starting to see some stability, the beginnings.
It’s very much what I call now the pig in the python. You have to look at their liabilities. So you have to look at their bad debt, and you have to continue to watch how the company is digesting its bad debt.
At the same time, you have to see the new debt that’s coming in, the new loans that they’re giving out. It’s fascinating. It amazes me, with financial institutions, the extent, the amount of new loans that are being created in relation to the total loan portfolio.
So it’s just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans?
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Breen: And so for Citigroup, it’s safe to say they are far enough out of the woods that you’re comfortable with the equity, where, with the real-estate debt, with the bankruptcy, it’s a different situation, and you’re taking a different spot on the capital structure.
Berkowitz: Right. We’re in there. Our major partner is the U.S. government. I mean, Citigroup is woven into the fabric of the United States. Citigroup will be around. I hope it will be around in a smaller form. It will be around in a better form, it most likely will be around with different management, and Citigroup will move on.