Citi's giant write-downs: What did it know, and when did it know it?

The banking company seems to have taken a long time in announcing its big news.

Facts coming out in the media, including those in a Fortune article being released with this online posting make it clear that Citigroup delayed for more than a week - from Saturday, October 27th until Sunday, November 4th - in announcing material information about the multi-billion-dollar write-downs it expects to record in this quarter. In the more than a week that passed, there were five trading days - October 29th through November 2nd - in which investors buying and selling Citigroup (Charts, Fortune 500) stock did not know that the write-downs were coming.

Withholding material facts from the investing public makes a company vulnerable to shareholder lawsuits. Securities laws specify that material information must be released on a "rapid and current basis," which is defined as four business days.

On Saturday, November 10th, Fortune sent an email to Citi, asking for a response to the magazine's intention to publish this online article, whose point would be that Citi's delay in announcing its impending write-downs did not conform to the rules concerning material information. The e-mail laid out the chronology and facts that led Fortune to believe that was true.

Citi, speaking through Leah Johnson, senior vice president for global corporate affairs, replied on the same day by saying, "We complied with all applicable legal requirements." Citi challenged one fact - we'll get to that. And Johnson made this summation about Citi's estimate that it would record huge write-downs of $8 billion to $11 billion on subprime-related securities in this quarter: "We felt it would be irresponsible to make a public statement about the problem until we had a sufficient level of confidence about the range. As soon as we had that level of confidence, we released the range. Both internal and outside counsel were involved in every step of the process."

It is interesting that even when Citi finally released its range on Sunday, November 4th, it was so wide that it did not suggest a high level of confidence. Speaking to analysts the next day, Gary Crittenden, Citi's chief financial officer, stressed that even the $8 billion to $11 billion range is uncertain because market events could change valuations.

The after-tax effect of the amounts Citi announced would be $5 billion to $7 billion. The lower amount would probably wipe out most of Citi's earnings for this quarter. The higher amount would probably push Citi to a loss.

Crittenden says that he and other Citi executives met late on Thursday, October 25th to consider downgrades that had recently been issued by ratings agencies and to determine how these changes would affect the value of collateralized debt obligations (CDOs) that Citi held. The Citi group concluded unhappily that significant write-downs would be necessary - a huge blow considering that Citi had announced third-quarter write-downs of CDOs on October 15th and had thought it was past that problem. The group also concluded that it could not determine an estimate for the write-downs until it studied the matter further.

Source - CNN Money