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Citigroup ( C) is arguably the worst of what is left of the U.S. banking industry. Unfortunately, it is also the biggest.

With $1.9 trillion in assets, Citigroup is larger than Bank of America ( BAC) and the beneficiary of more federal bailout money, in the form of capital injections and federal guarantees, than insurance company AIG ( AIG). Now with federal money being converted to common shares, diluting common shareholders in the process, the health of Citigroup is as shaky as ever.

TheStreet.com Ratings

Investors have argued that Citigroup's 88% share-price drop over the past year, versus 81% for Bank of America and 37% for the benchmark S&P 500, creates an alluring opportunity. However, with an adjusted beta value of 2.6 -- measuring stock-price volatility -- Citigroup could implode, leaving investors burned.

As of Dec. 31, Citigroup had mortgage-backed securities classified as available-for-sale and held-to-maturity with an amortized cost of $70.5 billion with a fair value of $57.6 billion, which represents a write-down in value of 18%, or $12.9 billion. Much of these losses have been omitted from Citigroup's balance sheet because the company has started to record nearly all of the riskiest assets as held-to-maturity, avoiding the need to deduct the unrealized losses from these securities in comprehensive income, which would further erode Citigroup's already tenuous equity position.

There is also an indication in the footnotes to the company's financial statements that the write-downs have been scaled back from what may be considered absolute adherence to mark-to-market principals.

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.

TheStreet.com Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research, click here now!
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.

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