Citigroup: A Way of Shorting Washington - TheStreet

Citigroup: A Way of Shorting Washington

Senior writer Dan Freed says Washington's inherent inertia is creating a buying opportunity in shares of Citigroup.
Publish date:



) -- Like it or not, Washington doesn't matter, and buying shares of


(C) - Get Report

would seem to be a nice way of putting money behind that view.

This thought occurred to me while reading James Fallows'

cover story

in the latest issue of

The Atlantic Monthly

, entitled "How America Can Rise Again."

Fallows, one of our nation's best "big picture" journalists and thinkers, argues that the much-discussed decline of America is in many ways overstated. However, what he calls "the biggest problem," and one that is essentially unfixable, is a totally dysfunctional political system. Fallows cites a statement attributed to a former Los Angeles politician who describes city government as being like a big bus in which every seat has a brake. In other words, it is easy to stop the bus, but impossible to drive it.

This may be the best metaphor I've ever heard to describe U.S. politics, and if you believe it, you can apply it to many types of investments.

Just look at the largest three HMOs. No industry was expected to be harmed more by an Obama victory. Still, since the close of trading on election day, Nov. 4, 2008, and even with versions of "reform" legislation having passed both the House and Senate,







UnitedHealth Group

(UNH) - Get Report

have all handily beaten the S&P 500.

Investors in big banks like

Goldman Sachs

(GS) - Get Report


Bank of America

(BAC) - Get Report


JPMorgan Chase

(JPM) - Get Report

appeared to demonstrate on Tuesday that they are already ignoring Washington as these stocks rallied

even as the CEOs of those companies took a grilling from a commission created by Congress

to investigate the causes of the financial crisis.

Still, there is a certain amount of concern about regulatory reforms baked into the shares of the big banks. It is very hard to say how much, but it's there.

But if you assume the status quo stays in place, the bank that would seem to have the most upside is Citigroup. You may say Citigroup is badly run. You may note that it already trades at a huge multiple to forward earnings expectations. But the logic to buy the stock at these levels is simple: it is giant and it is not going away. The government won't let it. Especially since it still owns a significant stake.

And sure, the stock may be held back to some extent of by the overhang of that stake, which the government was looking to exit through the company's $20 billion equity offering in December, but it also provides some pricing support, as the government wasn't willing to sell out at $3.15 a share since it came in at the equivalent of $3.25 a share.

What may ultimately tip the scales is interest from institutional investors, who still don't see Citigroup as a core holding the way they do the company's big bank brethren. They currently own just 27% of the stock, compared to more than 60% of Wells Fargo, JPMorgan and Bank of America.

As institutions gradually accept the fact that Citi isn't going away, they will have to buy it, which will drive up the stock. Retail investors certainly aren't going to sell a stock that is surging, and the issue's ample liquidity -- it's routinely the most heavily traded stock on the New York Stock Exchange -- will be an asset whenever the government does start to pare its holdings.


Written by Dan Freed in New York