Michael Shulman

Don't Stop 'Banking' on a Bailout

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Wachovia Got Whacked … Who's Next?

The Federal Deposit Insurance Corp. (FDIC) took over Wachovia's deposits, who then sold them to Citigroup (C).

Citi, in turn, granted up to $12 billion in preferred shares to the FDIC. It also guaranteed up to $32 billion in bad Wachovia assets.

The FDIC is on the hook for the rest, hence the preferred shares.

Citi made a smart move because now it's too big to fail. And since the government has essentially pledged its commitment to the big banks while tossing the smaller frys, like Lehman Bros., to the wolves, Citi is on higher ground.

But that higher ground isn't entirely solid ground. Citi may have announced a 50% dividend cut and $10 billion equity raise, but it's not nearly enough. The company is grossly overvalued, and it will need to radically dilute shareholders, which will hit C's stock values.

If you've been holding Citi long, waiting for a turnaround, you may want to reconsider -- unless you've got a lot of time on your hands. Much of its future depends on what promises were made to the company about the upcoming bad-asset auctions and at what price it will be able to sell these assets to Uncle Sam.

In fact, everything is hanging in the balance while we wait for Uncle Sam's stance. There are a lot of wild cards in the next month that will have unpredictable effects on the market including:

• The signing of the bailout bill
• The first bad-asset auction and the "bid" or price for banks' assets
• The election

If today is any indication, we are in for a wild ride … or more like a wild slide.