Tuesday, January 15, 2008

Citigroup's Bubble, Bubble, Toil and Trouble

Citigroup announced a cornucopia of bad news this morning:

- $18 billion write-down
- $12.5 billion cash infusion from outside investors, including Government of Singapore Investment Corp, Saudi Prince Alwaleed bin Talal and former Citi CEO Sandy Weill
- 41% dividend cut
- 70% decline in year-over-year revenue
- a 4,200 job cut -- at minimum
- $9.8 billion net loss -- the biggest quarterly loss in the bank’s 196-year history.

Merrill Lynch, Wells Fargo, JP Morgan and Washington Mutual all report earnings this week. While Citi is expected to be the worst of the bunch, similar write-downs and losses are practically guaranteed.

When the dust settles, this might be the worst quarter for financials since the Great Depression.

Citigroup Posts Record Loss on $18 Billion Writedown

By Bradley Keoun

Jan. 15 (Bloomberg) -- Citigroup Inc. posted the biggest loss in the bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier, the New York-based bank said in statement. Citigroup reduced its dividend by 41 percent and is selling $14.5 billion of preferred stock to investors including the government of Singapore to shore up depleted capital. Chief Executive Officer Vikram Pandit eliminated 4,200 jobs and plans more cuts.

The results are ``unacceptable,'' Pandit said today on a conference call with analysts and investors. He was installed in December after Charles ``Chuck'' Prince stepped down amid mounting subprime losses. ``We need to do better, and we will.''

Citigroup fell 7.3 percent in New York trading as the largest U.S. bank warned of rising delinquencies on its $214 billion portfolio of home loans and said more credit-card and auto loans were going bad. The bank cited a slowing economy in setting aside $5.2 billion to cover loan losses in its U.S. consumer division, about five times the year-earlier amount.

The markdown on subprime securities, almost double what the company forecast in November, also was the biggest so far among the world's top financial companies, exceeding the $14 billion taken by Zurich-based UBS AG, Europe's largest bank.

Alwaleed, Weill

Citigroup obtained a portion of the new capital from a handful of its biggest investors, including Los Angeles-based Capital Group Cos., Saudi Prince Alwaleed bin Talal and the New Jersey Division of Investment. Former CEO Sanford I. Weill, who owned almost 17 million Citigroup shares as of April 2006, also bought preferred stock.

``They've got themselves in a deep, desperate hole and it's going to take them all of 2008 to work their way out of it,'' Jon Fisher, who helps manage $22 billion at Minneapolis-based Fifth Third Asset Management, said in an interview on Bloomberg TV. Fifth Third owns shares of Citigroup. ``There are probably issues on their balance sheet that the management team, who's only really been running the company for about a month, doesn't even know about.''

The net loss exceeded analysts' estimates of 97 cents a share, according to a survey by Bloomberg. Citigroup has lost about half its market value in the past year, falling $2.12 today in New York Stock Exchange composite trading to $26.94 as of 4 p.m. It was the lowest price since 2002.

Rating Downgrade

Standard & Poor's reduced its long-term rating on Citigroup to AA- from AA after the earnings announcement, reflecting the ``severe losses'' and the likelihood that the bank's 2008 performance ``could be rocky.''

Founded in 1812 as the City Bank of New York, Citigroup cut its quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the modern company was formed from the 1998 merger of Citicorp and Travelers Group Inc., will allow the bank to retain about $4.4 billion of additional capital per year. As recently as November, Robert Rubin, the former U.S. Treasury secretary who chairs the bank's executive committee, had pledged to spare the dividend.

Citigroup had to turn to outside investors for fresh capital for the second time in two months. The bank generated $12.5 billion by selling convertible preferred shares to private investors, including $6.88 billion to an investment fund controlled by the government of Singapore. Another $2 billion of preferred shares will be sold to the public.

Abu Dhabi

In November, the bank got a $7.5 billion injection from the ruling family of the Middle Eastern emirate Abu Dhabi, and it raised about $4.3 billion during the fourth quarter by selling about $4.3 billion of ``enhanced trust preferred securities.'' In all, Citigroup has raised about $26.3 billion, helping to allay concern that the company might run short of capital.

``Capital adequacy should no longer be a near-term issue,'' Sandler O'Neill & Partners analyst Jeff Harte said in a note to clients.

Citigroup's credit-default swaps -- financial instruments that fixed-income traders use to bet on a company's default risk -- fell by 2 basis points to 83, indicating a lower likelihood of default, according to Phoenix Partners Group.

Alwaleed, the 52-year-old billionaire, already owns 4 percent of the company. He has been Citigroup's biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of funds. In 1991, then-CEO John Reed suspended the bank's dividend, and he didn't restore it until 1994.

Weill's Strategy

Weill, 74, spent 17 years building Citigroup through a series of bank, brokerage and insurance-company mergers, ultimately beating out Reed for the top job, retiring as CEO in 2003 and naming Chuck Prince his successor.

The decision to cut about 1.1 percent of the company's 375,000 employees as of the end of 2007 follows Pandit's pledge in December to conduct a ``front-to-back'' expense review of the company. The workforce had swelled from 327,000 at the end of 2006, even as Prince and former Chief Operating Officer Robert Druskin eliminated about 17,000 jobs.

Pandit, 51, said on the conference call that the review isn't over, and today's job announcement was only a ``down payment.''

Pandit aims to complete his cost review by April and may announce then whether to sell or spin off businesses within Citigroup, which spans 100 countries, according to two people familiar with the situation. Some analysts, including Deutsche Bank AG's Mike Mayo, have called for a breakup, saying the company is too unwieldy to manage.

Investment Banking

The latest job cuts, scheduled to take place this month, are mostly in the company's trading and investment-banking division, which posted a fourth-quarter loss of $11 billion after earning $1.75 billion a year earlier.

Citigroup's overall revenue in the fourth quarter fell 70 percent from a year earlier to $7.22 billion, while operating expenses climbed 18 percent to $16.5 billion. The company's consumer-banking unit had net income of $756 million, down 71 percent from the prior year, and earnings at the global wealth management division, which includes the Smith Barney brokerage, rose 27 percent to $523 million.

For the full year, Citigroup had a $3.62 billion profit, down 83 percent from 2006.

`Skyrocketing' Losses

``Consumer loss rates are skyrocketing,'' Meredith Whitney, an analyst at CIBC World Markets, said in a Bloomberg TV interview. Whitney estimated additional charges or loan losses of between $5 billion and $10 billion.

The fourth quarter may be the worst earnings period for the financial industry since the Great Depression. Analysts estimate Merrill Lynch & Co., the biggest U.S. brokerage, will report a record loss of more than $3 billion after writing down the value of mortgage-related securities, and Bank of America Corp., the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.

Bank of America may report an 80 percent drop in fourth- quarter net income next week, and JPMorgan Chase & Co., the third-biggest U.S. bank, may post a 31 percent decline in earnings tomorrow.

``There seems to be no end of bad news,'' Laszlo Birinyi, president of Birinyi Associates Inc., whose research and investment firm oversees $300 million in Westport, Connecticut, said in an interview with Bloomberg Television.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

Citi Loses Almost $10B, Slashes Dividend:

Citigroup Inc. lost almost $10 billion in last year's final three months, the largest quarterly deficit in its 196-year history, and slashed its dividend and 4,200 jobs as it recorded a mammoth write-down for bad bets on the mortgage industry.


Citigroup, Merrill Receive $21 Billion From Investors:

Wall Street banks have now raised $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets

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