Citi going strong; Stress tests underway

CitiBank used to be the world’s biggest bank but have lost more than 95% of it’s stock value since 2008. On March 5, 2009, its shares dropped to 97 cents at one point and closed at $1.02. A week later on March 10, in a memorandum sent to Citi’s employees from Vikram Pandit, Citigroup’s beleaguered chief executive, said that after more than a year of staggering losses and three rescues from Washington, the giant financial company was once again making money. The stock recovered to $1.45 and closed the bullish week at $1.78.

This morning, C opened at $1.96 and never looked back. It briefly broke $2.50, marking an astounding 178% increase from barely two weeks ago.

The market is starving for any good news. News of Citi turning profit in the first two months of 2009 and Pandit's memorandum both fed the market bulls in the past two weeks. In addition, you can thank Obama for announcing Citi will not be nationalized and shareholders will not be wiped out.

However, it is far too early to label such rebound as a sign that the economy has bottomed out and is on the verge of recovery. Bear in mind that tens of billions of toxic mortgage-related assets still remain stuck on Citi’s balance sheet. Until they are removed, few private investors will be willing to pour new capital into the bank. Moreover, what on the economic horizon has substantially changed? Not much.

To determine the next course of action, stress tests are performed to ascertain the banks’ state of health. Those with fundamental insolvency with limited implications will be nationalized. Others will be assisted with bailouts till the regular credit and spending have recovered.

Interestingly, the other major bailout recipient, AIG, has recently paid $165 Million to executives which raises the question: "Bailouts for who exactly?"

Just two weeks ago, I completed stress tests for my bank’s loan portfolio requested by OSFI, the financial regulatory body in Canada. It was painful, slow, complicated and ultimately pointless. The model is not receptive to countless market factors and based its calculations on too many assumptions. Each case essentially is unique.

As such, I fail to imagine stress tests for the major banks which are hundreds of thousands-fold more complex and greater in numbers. The only way would be to do a specific stress test for specific factors then cross-factor them with another stress test for a different factor. This is extremely difficult, if not impossible when you consider the countless variables in play. Even if it is possible, that amount of time and money can be better spent on direct fiscal stimulus.

The real danger is that this recession turns out to be one of those rare times in history — the U.S. during the Great Depression and Japan since the 1990s — when no amount of fiscal stimulus will work.