Global No Confidence Vote: The Naked Citi

Economically we're approaching another fateful moment, another fork in the road...and quite likely another cliff ahead. The Dow tumbled to near 7,500 today, representing a devastating loss in the last week as the auto bailout has stalled out until December.

Far more sinister is the collapse of Citigroup, the number 2 bank in the US. Announcing 53,000 layoffs on Monday, the bank's stock has now imploded under the vital $5 a share point where institutional investors like pension plans and hedge funds aren't allowed to tread. This could trigger a massive selloff that will sink the company, and indeed Citi is now shopping itself around in a last ditch effort to get above the $5 mark.

It's the latest company to play "Deal or No Deal."

Citigroup Inc., which fell 26 percent in New York trading today, is considering selling off pieces of the bank or the whole company, the Wall Street Journal reported online, citing people familiar with the matter.

Talks are preliminary and don’t suggest that New York-based Citigroup is backing away from its insistence that it has sufficient capital and funding, the Journal said.

Buffeted by four straight quarterly losses, Citigroup has raised about $75 billion since December by selling assets and equity stakes, including a $25 billion injection from the U.S. Treasury. The government will do whatever it takes to stabilize Citigroup, including pouring more money into the company, because of the threat its failure would pose to the global economy, said Peter Wallison, a fellow at the Washington-based American Enterprise Institute.

“There is no question that Citigroup will not be allowed to fail,” said Wallison, who was Treasury Department general counsel under former President Ronald Reagan. “I would not think it is a good idea to restore the ban on short selling,” he said.

Citigroup declined $1.69 to a 15-year low of $4.71 on the New York Stock Exchange at 4:15 p.m. It has fallen 84 percent this year.

Like AIG, Citigroup will not be allowed to go under. Hundreds of billions will be poured into it over the next few days by Hank Paulson and friends. Another loaded Weapon of Financial Destruction has been pointed at the global financial system, and as sure as Jack Bauer saves the day in "24" the government will save the floundering company. Bank of America, the number one bank in the US, has slid to $11.25 or so.

The largest banks in the US are failing.

But even more sinister than that, the S&P 500 hit its lowest close since 1997.

"It was pretty brutal," said Phil Orlando, chief equity market strategist at Federated Investors.

He said the market is at a critical point, with the S&P having "tested" or closed below the lows of the previous bear market. Investors will be looking closely at the next few sessions to see if stocks can hold those key levels.

Since peaking at an all-time closing high of 1,565.15 on Oct. 9, 2007, the S&P 500 has lost 52%. The Dow has lost nearly 47% since closing at an all-time high of 14,164.53 on the same day. Since hitting a bull market high of 2,859.12 on Oct. 31, 2007, the Nasdaq has lost 54%.

"The wealth destruction is phenomenal," said Tom Schrader, managing director at Stifel Nicolaus.

Cut in half and still falling. Nobody knows what to do. We're out of rate to cut. We're not running on fumes, we're running on OTHER COUNTRY'S FUMES.

It's rather depressing. What's worse is I don't see a bottom to this yet. The housing crash rolls on, unemployment is rising sharply, and the consumer-driven economy is running out of consumers to consume.

It's a race to see who gets bailed out first, the automakers or Citigroup. I'm betting Citi, and I'm betting a deal will roll around before Monday, stoking another lovely bear market rally that will run smack into the reality of a dismal holiday shopping season come a couple weeks or so.

Citigroup will not be long for this earth in its current form. Bank of America is most likely next. These institutions are testing multi-year lows this week. We're down to a massive decision point here. Too Big To Fail is about to be tested.

Citigroup shares lost more than one-quarter of its market value on Thursday as investors questioned the banks ability to handle potential credit losses and writedowns in 2009.

The bank has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Citigroup has access to U.S. Federal Reserve funds, is working at insuring some of its debt and is reducing its balance sheet faster than any other company in the banking industry, said analyst Bove who believes these steps backstops the bank's liabilities.

"It would take a Depression every bit as large and long as the 1930s debacle to shake this company's viability," Bove said.

Care to test that theory? Nevermind...we're testing that right now.

Be prepared.

Cross-posted at the Frog Pond.