New York City, New York – (StockNewsDesk) – 07/16/2014 — On the same day, Citigroup’s stock was up impressively on better than expected earnings and it announced a $7 billion settlement with the US Department of Justice. The reason for this record settlement was to resolve charges stemming from sales of mortgage securities that contributed to the financial crisis. It has caused some controversy that a portion of the settlement that will go towards providing assistance to homeowners and other forms of relief will be tax deductible.
Overall, $3 billion out of the $7 billion settlement will be considered tax deductible. Based on tax laws, penalties cannot be deducted, but the other sums are deductible as business expenses. This recent news, although completely legal, only contributes to the negative tsunami of bad publicity for the bank. Citigroup has struggled as of late, in addition to the fraud charges, with a failed Federal Reserve stress test and the still lingering resentment, stemming from the bailout.
There was grumbling from politicians and citizens on both sides of the aisle that no one has been held responsible for the bailout. Richard Eskow, a senior fellow at America’s Future, writes in The Huffington Post, “These agreements leave criminal bankers with no incentive to mend their ways. They reinforce the message that they won’t be prosecuted, and allow them to keep their ill-gotten gains while shareholders pick up the tab for their wrongdoing. And they allow a too-big-to-fail bank with an extensive record of fraud to remain a systemic threat.”
Despite these difficulties, shareholders were clearly relieved that the matter was put behind the company, as they were fearing worse consequences. Historically, it is a good sign for companies suffering legal troubles when the matter is over, and the stock rallies on good new The worst enemy of a stock price is uncertainty so, upon resolution of uncertainty; it nty, it nds to be bullish. In Citigroup’s case, the tax deduction of a huge chunk of the settlement was another source of welcome news, as this money goes straight to the bottom line.
Citigroup seems to have procured a more favorable settlement, as other banks’ settlements included agreements that would waive deductibility. This agreement is good news for the beleaguered stock. For months, it has underperformed the broader average, as shown in the chart below:
This chart displays the inherent weakness in the stock, as it remains under its 2011 highs; in comparison, the S&P 500 is more than 50% above these levels. This disparity points to real problems in the business and as the ratio begins to heal, it is prudent to manage risk more carefully.
On shorter time frames, there is more reason for optimism as the stock has managed to break its trendline with an aggressive move higher and followed through on its move higher.