Citigroup Posts Record Loss on $18 Billion Writedown

Citigroup Inc. posted the biggest loss in the U.S. 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 largest U.S. bank said today in a statement. New York-based Citigroup also reduced its dividend by 41 percent, cut 4,200 jobs and obtained $14.5 billion from outside investors to shore up depleted capital.

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

Citigroup fell as much as 3.7 percent in New York trading as the writedown for subprime home loans and related securities was almost double what the company forecast in November and the loss exceeded analysts' estimates. The bank also set aside $5.2 billion to cover lending losses, including credit-card and auto loans where delinquencies increased.

The markdown on subprime securities is the biggest so far, exceeding the $14 billion reported by Zurich-based UBS AG, Europe's biggest bank. Former CEO Sanford I. Weill and Saudi Prince Alwaleed bin Talal, who is already Citigroup's largest individual shareholder, were among the investors contributing new capital to the bank.

`Deep, Desperate Hole'

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 slumped 47 percent in New York Stock Exchange composite trading during the past year. The shares fell 92 cents, or 3.2 percent, to $28.14 in composite trading at 9:52 a.m.

Standard & Poor's lowered 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.

Dividend Reduced

Citigroup, founded in 1812 as the City Bank of New York, cut the quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the merger of Citicorp and Travelers Group Inc. in 1998, will help save the company about $4.4 billion annually. The company said as recently as November that it had no plans to lower the payout to shareholders.

Citigroup also had to turn to outside investors for fresh capital for the second time in two months, bringing to $22 billion the total amount raised. The bank said it generated $6.88 billion by selling convertible preferred shares to an investment fund controlled by the government of Singapore. Similar shares were sold to Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, Prince Alwaleed and Weill.

In November, the bank got a $7.5 billion injection from the ruling family of the Middle Eastern emirate Abu Dhabi. 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.

Weill's Strategy

Weill, 74, spent 17 years building Citigroup through a series of bank, brokerage and insurance-company mergers before retiring as CEO in 2003 and naming Chuck Prince his successor.

Without a capital infusion, Citigroup's so-called Tier 1 capital ratio, which regulators monitor to assess a bank's ability to withstand loan losses, would fall below the company's target to about 7 percent, Goldman Sachs Group Inc. analyst William Tanona estimated last month.

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 downpayment.

Investment Banking

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.

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.

Losses `Skyrocketing'

Consumer loss rates are skyrocketing at this company, Meredith Whitney, a analyst at CIBC World Markets, said in a Bloomberg TV interview. I think there are further charges in the company's future. 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.

Merrill's Infusion

Merrill, the biggest U.S. brokerage, said earlier today it raised $6.6 billion by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

Two days after becoming CEO on Dec. 11, Pandit bailed out seven so-called structured investment vehicles, shifting $49 billion of assets onto Citigroup's balance sheet and obliging the company to increase its capital cushion. The decision increased the chances that Pandit would have to cut the dividend, according to CIBC's Whitney. The payouts to shareholders cost Citigroup about $2.7 billion a quarter.

Citigroup seen taking $15B in writedowns

Goldman Sachs analyst expects the bank's writedowns to spread over the next two quarters and foresees a possible dividend cut.

Citigroup Inc. was added to Goldman Sachs "Americas Sell List" Monday morning by analyst William Tanona, as he expects the company to take as much as $15 billion in writedowns and possibly cut its dividend.

The writedowns, which are likely to be spread over the next two quarters, stem from Citigroup's exposure to complex financial instruments known as collateralized debt obligations. So-called CDOs combine slices of assets and other debt.

Many CDOs are, in part, backed by subprime mortgages - loans given to customers with poor credit history. As those loans have gone increasingly into default, the value of CDOs has declined, forcing banks to take billions of dollars in writedowns.

Tanona said deteriorating housing and consumer metrics will likely depress earnings in other areas of business, including retail banking and credit card divisions.

Citigroup might also be forced to lower its dividend or look for new sources of funding to help maintain adequate capital ratios, Tanona wrote in a research note.

Furthering the current problems is Citigroup's lack of leadership, Tanona said. Citigroup's chief executive, Charles Prince, was forced into retirement earlier in the month after the bank took more than $6 billion in writedowns in the third quarter. It plans to write down an additional $8 billion to $11 billion in the fourth quarter.

Shares of Citigroup fell 2.8 percent, to $33.06 in pre-market trading. Shares have traded between $31.05 and $57 during the past year.

Source - CNN Money

European Stocks Drop for Third Week

European stocks slumped to their lowest in almost two months this week, paced by commodity producers as metal and oil prices fell.

Boliden AB, Europe's third-biggest copper refiner, and Anglo American Plc, the world's second-largest mining company, led commodity stocks lower. Porsche AG dropped as the weak dollar hurt the value of U.S. sales translated into euros.

The picture is dimming for commodity stocks, said Herbert Perus, who helps oversee the equivalent of $57 billion as head of global equities at Raiffeisen Capital Management in Vienna. The word recession is heard more and more often from the U.S. It's a very sentiment-driven market with a lot of scared investors.

The Dow Jones Stoxx 600 Index declined 1.3 percent this week. The benchmark has fallen 9 percent since reaching a 6 1/2- year high June 1 because of concern defaults among U.S. mortgage borrowers with the poorest credit profiles will hurt the rest of the economy.

It's reasonable to stay out of the energy sector as oil is clearly at a peak and companies benefiting from high crude prices are going to have a negative impact going forward, said Giorgio Mascherone, chief investment officer at Deutsche Bank SpA in Milan, which manages the equivalent of $46 billion.

Stoxx 600 basic resources shares lost 7 percent this week, the biggest decline in more than 3 months.

Crude Declines

Crude prices fell 1.8 percent this week in London after imports increased to 10.5 million barrels a day last week, the highest in almost three months, and added an extra 2.81 million barrels to U.S. crude-oil stockpiles, the Energy Department said Nov. 15. A 750,000 barrel-decline was forecast by analysts.

Zinc dropped to the lowest in almost 20 months. Lead slid to an eight-week low.

National benchmarks fell in 14 of the 18 western European markets. Germany's DAX Index lost 2.6 percent for the week, France's CAC 40 was little changed. The U.K.'s FTSE 100 fell 0.2 percent. The Stoxx 50 decreased 0.4 percent, and the Euro Stoxx 50, a measure for the euro region, also retreated 0.4 percent.

Boliden dropped 11.5 percent this week, as did Anglo American.

Kloeckner & Co. AG fell 6.3 percent. The German steel trader said Nov. 14 nine-month profit dropped after steel prices slumped. Prices have held steady this quarter, the company said. Net income dropped 35 percent to 114.6 million euros ($168 million).

Cold-rolled stainless steel, which is used in electrical appliances and construction, has fallen 30 percent in the past six months to 950 euros a metric ton, according to data from Steel Business Briefing. Kloeckner said it expects prices to remain stable or to rise slightly on good demand.

ThyssenKrupp AG, Germany's largest steelmaker, lost 9.2 percent and Salzgitter AG, the country's second-biggest, declined 9 percent.

Norsk Hydro ASA, the world's fourth-largest aluminum producer, retreated with the price of the metal. The stock declined 9 percent. Aluminum dropped 2.3 percent, the biggest weekly loss in more than a month.

Basic resources have been one of the most volatile sectors in the recent past, due to the underlying metal prices, which have been riding the roller coaster, said Christoph Berger, a fund manager at Cominvest Asset Management in Frankfurt, who helps manage $63 billion of European stocks.

Porsche AG, maker of the 911 sports car, lost 15 percent. The carmaker's main auto operations fell short of analysts' estimates. Operating profit fell to about 1 billion euros in the 12 months through July from about 1.2 billion euros a year earlier, excluding gains from its stake in Volkswagen AG, Porsche said Nov. 12.

Earnings were partly curbed by the weaker dollar. UBS AG said Nov. 13 a decline in the U.S. currency hurt the company's full-year income more than expected.

K+S AG plunged 12.2 percent after Europe's largest producer of potash used in fertilizers cut its profit forecast. A sliding U.S. dollar erodes the outlook for operating income and sales this year. Syngenta AG, the biggest maker of agricultural chemicals, and Yara International AG, the largest fertilizer maker, also fell this week after K+S cut full-year estimates.

Alfa Laval AB tumbled 22.4 percent after the world's largest maker of heat exchangers said orders missed projections last month.

Vodafone Group Plc rose 6.7 percent. The world's biggest provider of mobile-phone services on Nov. 13 raised its sales and profit forecasts on accelerating growth in India and Turkey, as well as higher revenue from wireless Internet access in Europe.

Net income in the six months to Sept. 30 was 3.29 billion pounds ($6.8 billion), or 6.19 pence a share, compared with a year-earlier loss of 5.1 billion pounds, or 8.88 pence, Vodafone wrote Nov. 16 in a statement. Profit beat the median estimate of 3.03 billion pounds in a Bloomberg News survey of analysts.

Vodafone is a good performance indicator for the entire telecommunication services market, said Cominvest's Berger.

Barclays Plc led gains by bank stocks after the U.K.'s third-biggest lender wrote down about 1.3 billion pounds of credit-related securities tied to the U.S. subprime-mortgage market collapse.

Net charges and writedowns were 500 million pounds in the third quarter and 800 million pounds in October, the bank said Nov. 15.

The kind of transparency Barclays showed increases the amount of trust in the markets. The sooner this is done, the better, and this was a step in right direction, said Berger. The shares advanced 7.3 percent.

Source - Bloomberg

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

Bank of America expects hit from loans

Second largest U.S. bank says market dislocations will hurt fourth-quarter results but offers no estimate of impact.

Bank of America Corp. said Friday that continued market dislocations, including those related to the value of securities it owns that are backed by loans, will hurt its fourth-quarter results.

But the nation's second largest bank did not provide an estimate of how large the impact will be.

In a regulatory filing with the Securities and Exchange Commission, the bank said it has some exposure to collateralized debt obligations - complex financial instruments that combine slices of different kinds of risk. CDOs are often partly backed by subprime mortgages, or loans given to customers with poor credit history.

The Charlotte-based bank does not directly offer subprime loans, but the value of the CDOs has plummeted as an increasing number of subprime borrowers have defaulted on their home loans.

We expect these significant dislocations in the CDO market to continue, and it is unclear what impact these dislocations will have on other markets in which we operate or maintain positions, the filing said.

Bank of America shares rose 48 cents, or 1.1 percent, to $43.98 in late trading Friday.

Last month, the bank reported $607 million in trading losses and recorded $247 million in loan markdowns, helping reduce third-quarter profit by 32 percent to $3.7 billion.

Bank of America said it had provided more than $15 billion of liquidity support for commercial paper sold by CDOs, of which a net $9.8 billion is mainly backed by subprime residential mortgage securities. The bank said it also has more than $3 billion of exposure to CDOs through its structuring, warehousing and trading activities.

Earlier Friday, crosstown rival Wachovia Corp. said the value of securities it owns that are backed by loans sank by about $1.1 billion in October. The nation's fourth largest bank also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in certain regions of the nation's housing. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.

Mortgage-related writedowns across the banking industry eclipsed $40 billion during the third quarter, and the fourth quarter is shaping up to be just as bad, if not worse.

Wachovia was the third national financial institution to announce fourth-quarter writedowns eclipsing $1 billion. Citigroup Inc. said it will likely take between $8 billion and $11 billion in writedowns during the fourth quarter, while Morgan Stanley said it will take up to $6 billion in writedowns during its fiscal fourth quarter, which ends Nov. 30.

Also on Friday, JPMorgan Chase & Co. warned of possible fourth-quarter writedowns but did not give any specific potential figures in a quarterly filing with the SEC.

Source - CNN Money