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Marijuana Induced Asset Valuation

September 12, 2012

Readers of the book Stories In Credit Analysis and this blog would by now be fed up with our repeated assertion that carried asset values in big bank books has no semblance with reality.  But being human, it is very difficult for us not to say I told you so.

Yesterday Citigroup sold a part of its holding in its asset management joint venture with Morgan Stanley, Morgan Stanley Smith Barney, to Morgan Stanley.  Post the transaction, Morgan Stanley’s stake would increase from 51% to 65%.  The transaction valued the entity at $13.5 billion.  But Citigroup was carrying the asset on its balance sheet at an implied valuation of $22.5 billion.  So Citi would have to take a third quarter charge on its earnings.  But being an extraordinary expense (in the opinion of the banks, not in our opinion), this will not be a part of the headline EPS.  From a creditor standpoint, Citi’s Tier I capital ratio will be lower than what the bank has been strutting all along.  It will be even lower, if the other assets carried at fraudulent valuations are taken into account.

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From → Credit Analysis

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