A Survey of Bill Ackman and Bruce Berkowitz's Bullish Cases on Citigroup Inc.

• Money Talks: Thanks in large part to the government's conversion of its preferred stake in Citi to common stock in 2009, Citigroup is "probably one of the best capitalized banks today, ironically,"
• Free Money Is Even Better: Because Ben Bernanke has kept the fed funds rate effectively at zero, banks like Citigroup "effectively they've got free money,"
• Great Time to Loan It's a great time to make loans - they can earn attractive spreads because collateral values are down and lending standards are up.
• Franchise Value: Despite hits to its reputation in recent years, Citigroup still has a "great deposit franchise" and a "very well capitalized balance sheet," the fund manager says. In addition, he notes off camera Citi has less exposure to home equity loans than most of its big competitors.
• In sum, "it's really a great time to be in the banking business,"

In the U.S., this was not a bankruptcy, but it's gone through a scrubbing process, very similar to a bankruptcy, by the U.S. Treasury. Citigroup has spent a good amount of time with the U.S. government and many of its financial regulators, going through every liability and asset in the books.


After such a period of time, you normally are able to count the cockroaches. That is, the liabilities have been under a microscope for quite a period of time. There have been huge capital injections by the government. There's been a massive amount of dilution to old shareholders. And you're starting to see some stability, the beginnings.


It's very much what I call now the pig in the python. You have to look at their liabilities. So you have to look at their bad debt, and you have to continue to watch how the company is digesting its bad debt.


At the same time, you have to see the new debt that's coming in, the new loans that they're giving out. It's fascinating. It amazes me, with financial institutions, the extent, the amount of new loans that are being created in relation to the total loan portfolio.


So it's just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans?”

"People are so focused on the liabilities," he says, "that they've potentially forgotten about some of the assets."


"The price is right," Berkowitz says. "It's just a question of when it becomes obvious to everyone that the worst is over."


"The only way the government was going to allow repayment was if they thought the bank was recapitalized," he says.


"It's unclear to me how much our shareholders are going to make," says Berkowitz, "but it's becoming quite clear to me they're not going to lose.

Fairholme's $450 million investment in Citigroup in the fourth quarter of 2009 was his first sizable bet. Citi lost almost $30 billion in 2008 alone, and its shares fell more than 90% during the credit crisis. But by the fall of 2009, Berkowitz could see that good, conservative loans were replacing bad ones in Citi's lending businesses -- and even its so-called toxic assets were yielding more than 5%. "You have to normalize the environment -- that's the arbitrage," he says. "Are they going to make it through the tough times? And what are they going to look like in more normal times?" So far in 2010, Citi shares are up 34%, and Berkowitz believes they could easily double from here.