Is It Safe? Citigroup Is Living on the Edge

Citigroup has said: "During the market dislocations that started in the second half of 2007, certain markets became illiquid, and some key observable inputs used in valuing certain exposures were unavailable. When and if these markets become liquid, the valuation of these exposures will use the related observable inputs available at that time from these markets."

That means Citigroup executives thought some data about the true fair value of the company's holdings were unfairly negative, so the bank would value those assets at a more realistic price. That's certainly understandable. But it also means the recent relaxation of mark-to-market accounting, announced last week, will do little to aid Citigroup, as the bank has already accounted for losses in a manner that the new interpretation allows.

Currently, about half of the company's equity comes from preferred shares held by the government. Without this safety net, Citigroup would be operating with a leverage level of about 27 to 1. Any further write-downs to assets held on the balance sheet could quickly slice through the paper-thin equity that remains, requiring more government intervention and increased dilution for common shareholders.

TheStreet.com Ratings rates Citigroup as a "sell" with a grade of D. The company's stock should be avoided by all except traders betting on short-term movements.

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