Investor confidence in major financial institutions is sinking from bad to worse. Forbes reported in its current issue (November 12) that Citigroup (C) has the most "off balance sheet" assets of any bank, at $222 billion, and potential exposure of $80 billion in Structured Investment Vehicles (SIVs). Obviously, the resignation of Citi's CEO and the latest earnings restatement will add to the speculation that the bank may have to cut or suspend its dividend as well as recognize some substantial losses. There's no word of a SEC investigation into Citigroup's off balance sheet assets yet, but I would not be surprised if that is possibly in the works, too.
As a result, if you are an investor from outside the U.S., you probably think that the U.S. financial system is imploding. No wonder the U.S. dollar continues to collapse, which helps many of my Global Growth stocks. Just to demonstrate what a mess the financial system is in, USA Today reported that out of the 307 S&P 500 companies that had reported third quarter earnings so far, the average year-over-year change is DOWN 5.3%, the worst quarter since the fourth quarter of 2001, just after 9/11. However, USA Today added that if the earnings from the homebuilders and financial companies were subtracted, the earnings of all the other S&P 500 companies were a handsome +13.1%! Obviously, financial institutions account for the vast majority of the losses.
The sub-prime, CDO and SIV credit crisis is not limited to the U.S. Last week, Switzerland's Credit Suisse reported a 31% drop in earnings due to a $1.9 billion write off, due to mortgage and leverage loan commitments. However, since the crisis started in the U.S., we are being blamed other financial problems around the world. Merrill Lynch was the leader in CDOs and Citigroup was the leader in SIVs. It will be fascinating to see if any major banks in better shape will try to acquire either Merrill Lynch or Citigroup. One year from now, I suspect that at least one of these major financial institutions will have been acquired, possibly by a big foreign bank.
