Citigroup (C) shares are going up every day now, gaining 23% yesterday. So far, the stock has gone from a low of $.97 to $3.20 in just a few weeks.

The reason Citi stock is higher is simply that the market thinks that most of the trouble at the bank is over. That may not be true at all, but traders are gamblers and they going are “all in” on Citi.
The starting point of the rally in the bank’s shares is when its CEO said that it has made money in the first two months of the year. It could still lose $10 billion this month. The market seems willing to ignore that.

Even if Citi is not facing more risk in its portfolio of potentially toxic assets, there are plenty of other landmines facing the firm and the market seems to be ignoring them.

All big banks have to handle massive portfolios of business, real estate, and consumer loans—especially credit cards. That fact seems to have been lost on investors buying bank stocks during the last week.  Most money center banks have substantial exposure to debt in Eastern Europe. A lot of that debt may go into default if the economies of the small countries in that region fall apart. They do not have institutions like the Federal Reserve to flood their countries with liquidity.

The Fed is planning to put another several hundred billion dollars into buying up debt to help bring down interest rates. Nearly $300 billion of that will go to buying longer term Treasuries. If that causes interest rates to fall, it will help people who borrow money in the future, but may not do very much for Citi’s clients who borrowed money over the last two years. Many of those clients are tapped out, and the big bank faces hundreds of millions, possibly billions, of dollars in write-down of consumer loans. That does not take into account the amounts that will be lost as commercial mortgages and LBOs fail.

Perhaps the most important part of any analysis of Citi’s future is that it is not out of the “toxic paper” woods, as much as Mr. Vikram Pandit, the company’s CEO would have people think. According to Bloomberg, the IMF predicts that losses from U.S. loans and securitized assets will reach $2.2 billion.  Only about half of that amount has been written off on bank balance sheets, and over the 60 days since the agency put out the figure, it has not been revised.

Is the IMF number right? Probably not. When looking at a market as large as mortgage-backed securities, once the magnitude becomes too great, it is impossible to be precise to the last dime. But, the figure is almost certainly within a narrow range of the actual problem big banks still face.

And, Citi still has plenty of troubles ahead.

Douglas A. McIntyre

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